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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2004 Commission File No. 1-11166
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AXA FINANCIAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3623351
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1290 Avenue of the Americas, New York, New York 10104
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(Address of principal executive offices) (Zip Code)
(212) 554-1234
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Registrant's telephone number, including area code
None
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(Former name, former address, and former fiscal year if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
No voting or non-voting common equity of the registrant is held by
non-affiliates of the registrant as of November 12, 2004.
At November 12, 2004, 436,192,949 shares of the registrant's Common Stock were
outstanding.
REDUCED DISCLOSURE FORMAT:
Registrant meets the conditions set forth in General Instruction H(1)(a) and (b)
of Form 10-Q and is therefore filing this form with the Reduced Disclosure
Format.
Page 1 of 41
AXA FINANCIAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements
o Consolidated Balance Sheets, September 30, 2004 and December 31, 2003................ 3
o Consolidated Statements of Earnings, Three Months and Nine Months Ended
September 30, 2004 and 2003.......................................................... 4
o Consolidated Statements of Shareholders' Equity,
Nine Months Ended September 30, 2004 and 2003....................................... 5
o Consolidated Statements of Cash Flows, Nine Months Ended
September 30, 2004 and 2003.......................................................... 6
o Notes to Consolidated Financial Statements........................................... 7
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations ("Management Narrative")......................................... 30
Item 3: Quantitative and Qualitative Disclosures About Market Risk*............................ 39
Item 4: Controls and Procedures................................................................ 39
PART II OTHER INFORMATION
Item 1: Legal Proceedings...................................................................... 40
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds............................ 40
Item 3: Defaults Upon Senior Securities........................................................ 40
Item 4: Submission of Matters to a Vote of Security Holders.................................... 40
Item 5: Other Information...................................................................... 40
Item 6: Exhibits .............................................................................. 40
SIGNATURES ...................................................................................... 41
*Omitted pursuant to General Instruction H to Form 10-Q.
-2-
PART I FINANCIAL INFORMATION
ITEM 1: UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
AXA FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, December 31,
2004 2003
----------------- -----------------
(IN MILLIONS)
ASSETS
Investments:
Fixed maturities available for sale, at estimated fair value.............. $ 38,573.7 $ 29,143.1
Mortgage loans on real estate............................................. 5,019.7 3,503.1
Equity real estate, held for the production of income..................... 823.5 656.5
Policy loans.............................................................. 5,012.4 3,894.3
Other equity investments.................................................. 1,187.3 886.4
Other invested assets..................................................... 2,026.7 1,112.4
----------------- -----------------
Total investments..................................................... 52,643.3 39,195.8
Cash and cash equivalents................................................... 2,757.8 1,018.3
Cash and securities segregated, at estimated fair value..................... 1,181.4 1,285.8
Broker-dealer related receivables........................................... 2,295.4 2,284.7
Deferred policy acquisition costs........................................... 6,727.5 6,290.4
Goodwill and other intangible assets, net................................... 5,028.4 4,078.8
Value of business acquired ................................................. 841.2 -
Amounts due from reinsurers................................................. 3,061.7 2,455.6
Loans to affiliates, at estimated fair value................................ 400.0 400.0
Other assets................................................................ 4,017.7 3,741.7
Separate Accounts' assets................................................... 60,374.5 54,438.1
----------------- -----------------
TOTAL ASSETS................................................................ $ 139,328.9 $ 115,189.2
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 30,075.0 $ 25,307.7
Future policy benefits and other policyholders liabilities.................. 22,803.3 13,934.7
Broker-dealer related payables.............................................. 1,786.1 1,264.8
Customers related payables.................................................. 1,992.7 1,897.5
Short-term and long-term debt............................................... 3,566.9 2,628.1
Loans from affiliates....................................................... 1,280.0 -
Income taxes payable........................................................ 1,900.3 1,941.0
Other liabilities........................................................... 4,719.8 3,995.5
Separate Accounts' liabilities.............................................. 60,374.5 54,300.6
Minority interest in equity of consolidated subsidiaries.................... 1,494.3 1,257.5
Minority interest subject to redemption rights.............................. 391.7 488.1
----------------- -----------------
Total liabilities..................................................... 130,384.6 107,015.5
----------------- -----------------
Commitments and contingencies (Note 14)
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 500 million shares authorized, 436.2 million
shares issued and outstanding............................................ 3.9 3.9
Capital in excess of par value.............................................. 1,108.1 1,102.3
Retained earnings........................................................... 6,920.8 6,194.8
Accumulated other comprehensive income...................................... 911.5 872.7
----------------- -----------------
Total shareholders' equity............................................ 8,944.3 8,173.7
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................................. $ 139,328.9 $ 115,189.2
================= =================
See Notes to Consolidated Financial Statements.
-3-
AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2004 2003 2004 2003
--------------- ---------------- --------------- ---------------
(IN MILLIONS)
REVENUES
Universal life and investment-type
product policy fee income.......................... $ 468.9 $ 347.8 $ 1,216.0 $ 997.8
Premiums............................................. 387.7 203.5 849.6 661.5
Net investment income................................ 771.1 586.7 2,047.5 1,792.1
Investment (losses) gains, net....................... (4.4) 3.4 53.1 (93.2)
Commissions, fees and other income................... 1,003.8 745.4 2,702.7 2,138.3
--------------- --------------- --------------- ---------------
Total revenues................................. 2,627.1 1,886.8 6,868.9 5,496.5
--------------- ---------------- --------------- ---------------
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits.............................. 741.3 391.9 1,651.9 1,271.1
Interest credited to policyholders' account balances. 307.6 245.0 819.5 723.0
Compensation and benefits............................ 598.1 408.5 1,534.5 1,260.5
Commissions.......................................... 245.5 210.4 637.8 580.7
Distribution plan payments........................... 90.4 94.7 280.3 275.7
Amortization of deferred sales commissions........... 43.3 52.5 138.5 157.8
Interest expense..................................... 66.1 50.0 162.3 147.3
Amortization of deferred policy acquisition costs
and value of business acquired..................... 135.2 106.7 315.5 282.3
Capitalization of deferred policy acquisition costs.. (293.1) (272.8) (776.2) (754.9)
Rent expense......................................... 61.0 48.7 158.6 143.6
Amortization of other intangible assets, net......... 11.2 6.3 24.2 18.8
Other operating costs and expenses................... 322.3 373.7 770.7 759.1
--------------- --------------- --------------- ---------------
Total benefits and other deductions............ 2,328.9 1,715.6 5,717.6 4,865.0
--------------- ---------------- --------------- ---------------
Earnings from continuing operations before
income taxes and minority interest................. 298.2 171.2 1,151.3 631.5
Income taxes......................................... (55.3) (53.0) (295.1) (163.8)
Minority interest in net income of
consolidated subsidiaries.......................... (62.2) (9.2) (198.3) (120.7)
--------------- ---------------- --------------- ---------------
Earnings from continuing operations.................. 180.7 109.0 657.9 347.0
Earnings from other discontinued operations, net
of income taxes................................... 4.7 .7 8.0 .8
Gain on sale of real estate held-for-sale, net of
income taxes..................................... 10.9 - 10.9 -
Gain on disposal of the discontinued Investment
Banking and Brokerage segment, net of income
taxes............................................ - - 53.2 -
Cumulative effect of accounting changes, net of
income taxes...................................... - - (4.0) -
--------------- ---------------- --------------- ---------------
Net Earnings......................................... $ 196.3 $ 109.7 $ 726.0 $ 347.8
=============== ================ =============== ===============
See Notes to Consolidated Financial Statements.
-4-
AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
2004 2003
----------------- -----------------
(IN MILLIONS)
SHAREHOLDERS' EQUITY
Common stock, at par value, beginning of year and end of period............. $ 3.9 $ 3.9
----------------- -----------------
Capital in excess of par value, beginning of year as previously reported.... 1,102.3 1,028.6
Prior period adjustment related to deferred Federal income taxes............ - 59.0
----------------- -----------------
Capital in excess of par value, beginning of year as restated............... 1,102.3 1,087.6
Other changes in additional capital in excess of par value.................. 5.8 10.4
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Capital in excess of par value, end of period............................... 1,108.1 1,098.0
----------------- -----------------
Retained earnings, beginning of year as previously reported................. 6,194.8 5,805.5
Prior period adjustment related to deferred Federal income taxes............ - 162.1
----------------- -----------------
Retained earnings, beginning of year as restated............................ 6,194.8 5,967.6
Net earnings................................................................ 726.0 347.8
Dividends on common stock................................................... - (100.0)
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Retained earnings, end of period............................................ 6,920.8 6,215.4
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Accumulated other comprehensive income, beginning of year................... 872.7 655.1
Other comprehensive income.................................................. 38.8 334.8
----------------- -----------------
Accumulated other comprehensive income, end of period....................... 911.5 989.9
----------------- -----------------
TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD................................... $ 8,944.3 $ 8,307.2
================= =================
See Notes to Consolidated Financial Statements.
-5-
AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
2004 2003
--------------- -----------------
(IN MILLIONS)
Net earnings.................................................................. $ 726.0 $ 347.8
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Interest credited to policyholders' account balances...................... 819.5 723.0
Universal life and investment-type product policy fee income.............. (1,216.0) (997.8)
Net change in broker-dealer customer related receivables/payables......... (190.3) 236.6
Investment (gains) losses, net............................................ (53.1) 93.2
Decrease (increase) in segregated cash and securities, net................ 104.4 (194.2)
Change in deferred policy acquisition costs and value of
business acquired....................................................... (461.6) (472.6)
Change in future policy benefits.......................................... 110.3 (84.5)
Change in property and equipment.......................................... (54.1) (56.7)
Change in income tax payable.............................................. 200.8 73.0
Change in fair value of guaranteed minimum income benefit
reinsurance contract.................................................... (55.0) 58.0
Gain on disposal of Investment Banking and Brokerage segment.............. (53.2) -
Minority interest in net income of consolidated subsidiaries.............. 198.3 120.7
Other, net................................................................ 122.0 628.0
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Net cash provided by operating activities..................................... 198.0 474.5
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Cash flows from investing activities:
Maturities and repayments................................................... 2,987.8 3,343.3
Sales....................................................................... 3,637.2 3,694.1
Purchases................................................................... (6,999.2) (8,813.6)
Change in short-term investments............................................ 532.6 356.8
Purchase of minority interest in consolidated subsidiary.................... (308.7) -
Acquisition of the MONY Group, Inc., net of cash and cash equivalents
acquired................................................................. (760.7) -
Other, net.................................................................. 258.2 31.6
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Net cash used by investing activities........................................ (652.8) (1,387.8)
---------------- ------------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits.................................................................. 2,944.0 4,615.1
Withdrawals and transfers to Separate Accounts............................ (1,965.1) (2,240.2)
Increase in loans from affiliates........................................... 1,280.0 -
Net increase in short-term financings....................................... 34.3 192.8
Dividends paid on common stock ............................................. - (100.0)
Other, net.................................................................. (96.9) (169.0)
---------------- ------------------
Net cash provided by financing activities..................................... 2,196.3 2,298.7
---------------- ------------------
Change in cash and cash equivalents........................................... 1,741.5 1,385.4
Cash and cash equivalents, beginning of year.................................. 1,018.3 501.7
---------------- ------------------
Cash and Cash Equivalents, End of Period...................................... $ 2,757.8 $ 1,887.1
================ ==================
Supplemental cash flow information
Interest Paid............................................................... $ 153.5 $ 133.7
================ ==================
Income Taxes Paid........................................................... $ 256.5 $ 92.5
================ ==================
See Notes to Consolidated Financial Statements
-6-
AXA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) ACQUISITION OF MONY
On July 8, 2004, the Holding Company completed its acquisition of MONY
and, under terms of the related merger agreement, paid or made provision
to pay MONY shareholders approximately $1.5 billion in cash, representing
$31 for each share of MONY common stock. MONY shareholders also received a
dividend from MONY totaling $0.34755 per share. The Holding Company funded
the acquisition by using available cash and issuing $1.28 billion of
Subordinated Notes to AXA and two AXA affiliates. The Subordinated Notes
have a floating interest rate, payable semiannually, and mature in 2019.
The interest rate resets semiannually on July 15 and January 15.
Concurrently, the Holding Company entered into an interest swap agreement
with AXA, converting the floating rate on these Subordinated Notes to a
fixed rate of 5.11% for the first three years. The acquisition provides
AXA Financial with additional scale in distribution, client base and
assets under management.
As of September 30, 2004, former MONY stockholders holding approximately
3.6 million shares of MONY common stock, representing approximately 7.1%
of MONY common stock outstanding at July 8, 2004 (the effective date of
the MONY acquisition), have demanded appraisal pursuant to Section 262 of
the General Corporation Law of the State of Delaware and have not
withdrawn their demands. The fair value of shares of MONY common stock
to be determined in the appraisal process, which is the amount that will
be payable by AXA Financial to the holders of shares subject to the
appraisal, could be greater or less than the $31.00 per share paid to
former MONY stockholders who did not demand appraisal under Delaware law.
See Note 14 of Notes to Consolidated Financial Statements.
The acquisition was accounted for using the purchase method under SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets". For accounting purposes (due to convenience and the
immateriality of the results of MONY from July 1, 2004 through July 8,
2004), AXA Financial has consolidated MONY and reflected its results from
July 1, 2004 in its consolidated statements of earnings and cash flows.
Under the purchase method of accounting, the assets acquired and
liabilities assumed were recorded at estimated fair value at the date of
acquisition. Purchase adjustments required significant management
estimates and assumptions. The purchase adjustments related to value of
business acquired ("VOBA") and liabilities including policyholder reserves
required management to exercise judgment to assess the value of these
items. AXA Financial is in the process of completing the valuations of a
portion of the assets acquired and liabilities assumed; thus, the
allocation of the purchase price is subject to refinement.
AXA Financial's consolidated balance sheet at September 30, 2004 includes
the accounts of MONY, including its principal subsidiaries, MONY Life
Insurance Company ("MONY Life"), MONY Life Insurance Company of America
("MLOA"), U.S. Financial Life Insurance Company ("USFL"), The Advest
Group, Inc. ("Advest") and Enterprise Capital Management, Inc.
("Enterprise").
-7-
The following table presents the estimated fair values of the MONY assets
acquired and liabilities assumed:
FAIR VALUE
AT JULY 1, 2004
-------------------
(IN MILLIONS)
ASSETS ACQUIRED
Investments
Fixed maturities................................................................ $ 7,805.0
Mortgage loans on real estate................................................... 1,943.2
Policy loans.................................................................... 1,162.6
Other equity investments........................................................ 260.3
Other invested assets........................................................... 1,491.8
-------------------
Total investments........................................................... 12,662.9
Cash and cash equivalents.......................................................... 795.4
Reinsurance recoverable............................................................ 550.8
Goodwill........................................................................... 593.4
Value of business acquired......................................................... 863.7
Other intangible assets............................................................ 172.0
Other assets....................................................................... 405.8
Separate Accounts' assets.......................................................... 4,950.3
-------------------
Total Assets Acquired.............................................................. $ 20,994.3
===================
LIABILITIES ASSUMED
Policy liabilities................................................................. $ 12,025.6
Short-term and long-term debt...................................................... 940.8
Other liabilities.................................................................. 1,511.6
Separate Accounts' liabilities..................................................... 4,950.4
-------------------
Total Liabilities Assumed........................................................ $ 19,428.4
===================
Net Assets Acquired................................................................ $ 1,565.9
===================
All of MONY's results are reported in the Financial Advisory/Insurance
segment. Of the $593.4 million in goodwill, none is expected to be
deductible for tax purposes.
In addition to goodwill, intangible assets of $1,035.7 million were
recorded as a result of the acquisition. Intangibles assets subject to
amortization include the following:
FAIR VALUE ASSIGNED
AS OF JULY 1, 2004 AMORTIZATION RANGE
----------------------- -----------------------
(IN MILLIONS)
VOBA............................................... $ 863.7 10-30 years
Insurance distribution network..................... 64.0 10-20 years
Brokerage distribution system...................... 27.1 8 years
Mutual fund distribution fees...................... 20.9 5-6 years
In addition, mutual fund investment management contracts were assigned a
fair value of $60.0 million as of July 1, 2004, which is not subject to
amortization.
2) BASIS OF PRESENTATION
The preparation of the accompanying unaudited consolidated financial
statements in conformity with U.S. GAAP requires management to make
estimates and assumptions (including normal, recurring accruals) that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. The accompanying
unaudited interim consolidated financial statements reflect all
adjustments necessary in the opinion of management to present fairly the
consolidated financial position of AXA Financial and its consolidated
results of operations and cash flows for the periods
-8-
presented. All significant intercompany transactions and balances except
those with Other Discontinued Operations (see Note 9) have been eliminated
in consolidation. These statements should be read in conjunction with the
audited consolidated financial statements of AXA Financial for the year
ended December 31, 2003. The results of operations for the nine months
ended September 30, 2004 are not necessarily indicative of the results to
be expected for the full year.
The terms "third quarter 2004" and "third quarter 2003" refer to the three
months ended September 30, 2004 and 2003, respectively. The terms "first
nine months of 2004" and "first nine months of 2003" refer to the nine
months ended September 30, 2004 and 2003 respectively.
In the third quarter 2004, AXA Financial's principal insurance subsidiary,
Equitable Life, changed its name to AXA Equitable Life Insurance Company.
Certain reclassifications have been made in the amounts presented for
prior periods to conform those periods to the current presentation.
3) PRIOR PERIOD ADJUSTMENT
A review by AXA Financial of Federal income tax assets and liabilities
during second quarter 2003 identified an overstatement of the deferred
Federal income tax liability related to the years ended December 31, 2000
and earlier. As a result, the Federal income tax liability as of December
31, 2001 and 2002 and September 30, 2003 was reduced by $221.1 million,
and the consolidated shareholders' equity as of such dates was increased
by $221.1 million, with no impact on the consolidated statements of
earnings for the years ended December 31, 2000, 2001 and 2002, the nine
months ended September 30, 2003 or any prior period after the adoption on
January 1, 1992 of SFAS No. 109, "Accounting for Income Taxes". This
adjustment has been reported in the accompanying financial statements as
an increase in consolidated shareholders' equity as of January 1, 2002.
4) PURCHASE OF MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
In March 2004, AXA Financial acquired 8.16 million Alliance Units at the
aggregated market price of $308.7 million from SCB Inc. and SCB Partners,
Inc. under a preexisting agreement. As a result of the transaction, AXA
Financial recorded goodwill of $162.1 million and other intangible assets
of $20.0 million. Other intangible assets are amortized on a straight-line
basis over their estimated useful lives of twenty years. Upon completion
of this transaction, AXA Financial's economic interest in Alliance
increased to approximately 58.4%.
5) ACCOUNTING CHANGES AND NEW ACCOUNTING PRONOUNCEMENTS
At March 31, 2004, AXA Financial completed its transition to the
consolidation and disclosure requirements of FIN No. 46(R),
"Consolidation of Variable Interest Entities, Revised".
At September 30, 2004, the Equitable Life Insurance Group's General
Account held $82.6 million of investment assets issued by VIEs and
determined to be significant variable interests under FIN No. 46(R). As
reported in the consolidated balance sheet, these investments included
$40.7 million of fixed maturities (collateralized debt and loan
obligations) and $41.9 million of other equity investments (principally
investment limited partnership interests) and are subject to ongoing
review for impairment in value. These VIEs do not require consolidation
because management has determined that the Equitable Life Insurance Group
is not the primary beneficiary. These variable interests and approximately
$14.7 million of funding commitments to the investment limited
partnerships at September 30, 2004 represent the Equitable Life Insurance
Group's maximum exposure to loss from its direct involvement with the
VIEs. The Equitable Life Insurance Group has no further economic interest
in these VIEs in the form of related guarantees, commitments, derivatives,
credit enhancements or similar instruments and obligations.
Management of Alliance has reviewed its investment management agreements
and its investments in and other financial arrangements with certain
entities that hold client assets under management to determine the
entities that Alliance is required to consolidate under FIN No. 46(R).
These included the Offshore Funds, hedge funds, structured products, group
trusts and joint ventures.
-9-
As a result of its review, Alliance consolidated an investment in a joint
venture and two of the joint venture's mezzanine funds as of March 31,
2004. The joint venture and mezzanine funds have client assets under
management totaling approximately $165 million at September 30, 2004.
Alliance's maximum exposure to loss is limited to its investments in and
prospective investment management fees earned from these entities.
Consolidation of these entities resulted in increases in AXA Financial's
assets, principally investments, and in its liabilities, principally
minority interest in consolidated entities, each of approximately $125.6
million, at September 30, 2004.
Alliance has significant variable interests in certain other VIEs with
approximately $.8 billion in client assets under management. However,
these VIEs do not require consolidation because management has determined
that Alliance is not the primary beneficiary. Alliance's maximum exposure
to loss in these entities is limited to its nominal investments in and
prospective investment management fees earned from these entities.
Alliance derives no direct benefit from client assets under management of
these entities other than investment management fees and cannot utilize
those assets in its operations.
Effective January 1, 2004, AXA Financial adopted SOP 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts". SOP 03-1 required a
change in AXA Financial's accounting policies relating to (a) general
account interests in separate accounts, (b) assets and liabilities
associated with market value adjusted fixed rate investment options
available in certain variable annuity contracts issued by Equitable Life,
(c) liabilities related to group pension participating contracts, and (d)
liabilities related to certain mortality and annuitization benefits, such
as the no lapse guarantee feature contained in variable and
interest-sensitive life policies.
The adoption of SOP 03-1 required changes in several of AXA Financial's
accounting policies relating to separate account assets and liabilities.
AXA Financial now reports the General Account's interests in separate
accounts as trading account securities within Other equity investments in
the consolidated balance sheet; prior to the adoption of SOP 03-1, such
interests were included in Separate Accounts' assets. Also, the assets and
liabilities of two Separate Accounts are now presented and accounted for
as General Account assets and liabilities, effective January 1, 2004.
Investment assets in these Separate Accounts principally consist of fixed
maturities that are classified as available for sale in the accompanying
2004 consolidated financial statements. These two Separate Accounts hold
assets and liabilities associated with market value adjusted fixed rate
investment options available in certain variable annuity contracts. In
addition, liabilities associated with the market value adjustment feature
are now reported at the accrued account balance. Prior to the adoption of
SOP 03-1, such liabilities had been reported at market adjusted value.
Prior to the adoption of SOP 03-1, the liabilities for group pension
participating contracts were adjusted only for changes in the fair value
of certain related investment assets that were reported at fair value in
the balance sheet (including fixed maturities and equity securities
classified as available for sale, but not equity real estate or mortgage
loans) with changes in the liabilities recorded directly in Accumulated
other comprehensive income to offset the unrealized gains and losses on
the related assets. SOP 03-1 also required an adjustment to the
liabilities for group pension participating contracts to reflect the fair
value of all the assets on which those contracts' returns are based,
regardless of whether those assets are reported at fair value in the
balance sheet. Changes in the liability related to fluctuations in asset
fair values are now reported as Interest credited to policyholders'
account balances in the consolidated statements of earnings.
In addition, the adoption of SOP 03-1 resulted in a change in the method
of determining liabilities associated with the no lapse guarantee feature
contained in variable and interest-sensitive life contracts. While both
AXA Financial's previous method of establishing the no lapse guarantee
reserve and the SOP 03-1 method are based on accumulation of a portion of
the charges for the no lapse guarantee feature, SOP 03-1 specifies a
different approach for identifying the portion of the fee to be accrued
and establishing the related reserve.
The adoption of SOP 03-1 as of January 1, 2004 resulted in a decrease in
the first nine months of 2004 net earnings of $4.0 million and an increase
in other comprehensive income of $12.4 million related to the cumulative
effect of the required changes in accounting. The determination of
liabilities associated with group pension participating contracts and
mortality and annuitization benefits, as well as related impacts on
deferred acquisition costs, is based on models that involve numerous
estimates and subjective judgments. There can be no assurance that the
ultimate actual experience will not differ from management's estimates.
-10-
On May 19, 2004, the FASB approved the issuance of FASB Staff Position
("FSP") No. 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003",
effective for the first interim or annual period beginning after June 15,
2004. FSP 106-2 provides guidance on the accounting for the effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003
("MMA") for employers that sponsor postretirement health care plans that
provide prescription drug benefits. MMA introduced a new prescription drug
benefit under Medicare that will go into effect in 2006 and also includes
a Federal subsidy payable to plan sponsors equal to 28% of certain
prescription drug benefits payable to Medicare-eligible retirees. The
subsidy only is available to an employer that sponsors a retiree medical
plan that includes a prescription drug benefit that is at least as
valuable as (i.e., actuarially equivalent to) the new Medicare coverage.
The subsidy is not subject to Federal income tax.
Management and its actuarial advisors have not as yet been able to
conclude whether the prescription drug benefits provided under AXA
Financial's and MONY's retiree medical plans are actuarially equivalent to
the new Medicare prescription drug benefits for 2006 and future years.
Consequently, measurements of the accumulated postretirement benefit
obligation and net periodic postretirement benefit cost for these plans at
and for the period ended September 30, 2004 do not reflect any amount
associated with enactment of MMA, including the subsidy. Clarifying
regulations are expected to be issued by the Centers for Medicare and
Medicaid Services to address the interpretation and determination of
actuarial equivalency under MMA. In accordance with the provisions of FSP
106-2, management and its actuarial advisors will re-evaluate actuarial
equivalency as new information about its interpretation or determination
become available.
6) INVESTMENTS
Investment valuation allowances for mortgage loans and equity real estate
and changes thereto follow:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
2004 2003
--------------- ---------------
(IN MILLIONS)
Balances, beginning of year............................................... $ 20.5 $ 55.0
Additions charged to income............................................... 3.9 10.2
Deductions for writedowns and asset dispositions.......................... (11.4) (10.2)
Deduction for transfer of held for sale real estate
to held for production of income real estate.......................... - (31.5)
--------------- ---------------
Balances, End of Period................................................... $ 13.0 $ 23.5
=============== ===============
Balances, end of period comprise:
Mortgage loans on real estate........................................... $ 13.0 $ 21.1
Equity real estate...................................................... - 2.4
--------------- ---------------
Total..................................................................... $ 13.0 $ 23.5
=============== ===============
For the third quarter and first nine months of 2004 and of 2003,
investment income is shown net of investment expenses of $64.5 million,
$45.8 million, $153.1 million and $156.1 million, respectively.
As of September 30, 2004 and December 31, 2003, fixed maturities
classified as available for sale had amortized costs of $36,367.3 million
and $27,197.5 million. Also at September 30, 2004 and December 31, 2003,
respectively, Other equity investments included the Equitable Life General
Account's investments in Separate Accounts and other trading securities
having carrying values of $103.4 million and $.9 million and costs of
$101.0 million and $2.0 million and other equity securities with carrying
values of $55.9 million and $107.0 million and costs of $56.3 million and
$99.1 million.
In the third quarter and first nine months of 2004 and of 2003,
respectively, net unrealized and realized holding (losses) gains on
trading account equity securities of $(1.7) million, $0 million, $2.5
million and $2.3 million were included in net investment income in the
consolidated statements of earnings.
For the first nine months of 2004 and of 2003, proceeds received on sales
of fixed maturities classified as available for sale amounted to $3,422.8
million and $3,656.6 million, respectively. Gross gains of $52.8 million
and $82.7 million and gross losses of $11.0 million and $33.0 million were
realized on these sales for
-11-
the first nine months of 2004 and of 2003, respectively. Unrealized net
investment gains related to fixed maturities classified as available for
sale decreased by $190.3 million during the first nine months of 2004,
resulting in a balance of $2,206.8 million at September 30, 2004.
Impaired mortgage loans along with the related investment valuation
allowances for losses follow:
SEPTEMBER 30, December 31,
2004 2003
----------------- -----------------
(IN MILLIONS)
Impaired mortgage loans with investment valuation allowances............ $ 155.5 $ 149.4
Impaired mortgage loans without investment valuation allowances......... 17.6 29.1
----------------- -----------------
Recorded investment in impaired mortgage loans.......................... 173.1 178.5
Investment valuation allowances......................................... (17.6) (18.8)
----------------- -----------------
Net Impaired Mortgage Loans............................................. $ 155.5 $ 159.7
================= =================
During the first nine months of 2004 and 2003, respectively, AXA
Financial's average recorded investment in impaired mortgage loans was
$160.0 million and $169.3 million. Interest income recognized on these
impaired mortgage loans totaled $8.4 million and $7.5 million for the
first nine months of 2004 and 2003, respectively.
Mortgage loans on real estate are placed on nonaccrual status once
management believes the collection of accrued interest is doubtful. Once
mortgage loans on real estate are classified as nonaccrual loans, interest
income is recognized under the cash basis of accounting and the resumption
of the interest accrual would commence only after all past due interest
has been collected or the mortgage loan on real estate has been
restructured to where the collection of interest is considered likely. At
September 30, 2004 and December 31, 2003, respectively, the carrying value
of mortgage loans on real estate that had been classified as nonaccrual
loans was $97.0 million and $143.2 million.
In the third quarter, 2004, AXA Financial sold real estate and recorded a
$10.9 million (net of taxes of $5.8 million) gain on the sale. The
property sold was classified as real estate to be disposed of and is
reflected as discontinued operations in the consolidated statements of
earnings.
7) INTANGIBLE ASSETS
The following presents a summary of AXA Financial's intangible assets as
of September 30, 2004, related to the MONY acquisition:
GROSS
CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET
--------------- --------------- ---------------
(IN MILLIONS)
Intangible assets subject to amortization:
VOBA................................................. $ 863.7 $ (22.5)(1) $ 841.2
Insurance distribution network....................... 64.0 (1.2) 62.8
Brokerage distribution system........................ 27.1 (.9) 26.2
Mutual fund distribution fees........................ 20.9 (2.6) 18.3
--------------- --------------- ---------------
Total intangible assets subject to amortization... 975.7 (27.2) 948.5
--------------- --------------- ---------------
Intangible assets not subject to amortization:
Investment management contracts...................... 60.0 - 60.0
---------------- --------------- ---------------
Total Intangible Assets................................. $ 1,035.7 $ (27.2) $ 1,008.5
=============== =============== ===============
----------
(1) Includes reactivity to unrealized investment gains/losses.
In third quarter 2004, total amortization expense related to these
intangible assets was $14.4 million. Intangible assets amortization
expense is estimated to be $26.3 million for the remainder of 2004, and
ranging from $78.5 million to $64.2 million for 2005 through 2009.
-12-
8) CLOSED BLOCKS
In 1992, as a result of Equitable Life's demutualization, Equitable Life
established its Closed Block for the benefit of certain individuals'
participating policies that were in force as of the date of
demutualization. In 1998, as a result of MONY Life's demutualization, MONY
Life established its Closed Block for the benefit of certain individuals'
participating policies that were in force as of the date of
demutualization. Assets, liabilities and earnings of Equitable Life's and
MONY Life's Closed Blocks are specifically identified to support each
subsidiaries' participating policyholders.
The excess of the applicable Closed Block's liabilities over its Closed
Block assets (adjusted to exclude the impact of related amounts in
accumulated other comprehensive income) represents the expected maximum
future post-tax earnings from the Closed Block that would be recognized in
income from continuing operations over the period the policies and
contracts in the Closed Block remain in force. As of January 1, 2001, AXA
Financial has developed an actuarial calculation of the expected timing of
the Equitable Life Closed Block earnings and as part of the accounting of
the acquisition of MONY using the purchase method at July 1, 2004 has
developed an actuarial calculation of the expected timing of the MONY Life
Closed Block earnings.
If the actual cumulative earnings from the applicable Closed Block are
greater than the expected cumulative earnings, only the expected earnings
will be recognized in net income. Actual cumulative earnings in excess of
expected cumulative earnings at any point in time are recorded as a
policyholder dividend obligation because they will ultimately be paid to
the policyholders of the applicable Closed Block as an additional
policyholder dividend unless offset by future performance that is less
favorable than originally expected. If a policyholder dividend obligation
has been previously established and the actual Closed Block earnings in a
subsequent period are less than the expected earnings for that period, the
policyholder dividend obligation would be reduced (but not below zero).
If, over the period the policies and contracts in the applicable Closed
Block remain in force, the actual cumulative earnings of the Closed Block
were less than the expected cumulative earnings, only actual earnings
would be recognized in income from continuing operations. If the
applicable Closed Block has insufficient funds to make guaranteed policy
benefit payments, such payments will be made from assets outside the
Closed Block.
Many expenses related to a Closed Block's operations, including
amortization of DAC and VOBA, are charged to operations outside of the
Closed Block; accordingly, net revenues of the Closed Block do not
represent the actual profitability of the Closed Block operations.
Operating costs and expenses outside of the Closed Block are, therefore,
disproportionate to the business outside of the Closed Block.
-13-
Equitable Life Closed Block
---------------------------
Summarized financial information for the Equitable Life Closed Block is as
follows:
SEPTEMBER 30, December 31,
2004 2003
----------------- -----------------
(IN MILLIONS)
CLOSED BLOCK LIABILITIES:
Future policy benefits, policyholders' account balances and other.... $ 8,921.2 $ 8,972.1
Policyholder dividend obligation..................................... 292.4 242.1
Other liabilities.................................................... 174.5 129.5
----------------- -----------------
Total Closed Block liabilities....................................... 9,388.1 9,343.7
----------------- -----------------
ASSETS DESIGNATED TO THE CLOSED BLOCK:
Fixed maturities, available for sale, at estimated fair value
(amortized cost of $5,375.5 and $5,061.0).......................... 5,740.8 5,428.5
Mortgage loans on real estate........................................ 1,178.3 1,297.6
Policy loans......................................................... 1,343.6 1,384.5
Cash and other invested assets....................................... 64.0 143.3
Other assets......................................................... 219.8 199.2
----------------- -----------------
Total assets designated to the Closed Block......................... 8,546.5 8,453.1
----------------- -----------------
Excess of Closed Block liabilities over assets designated to
the Closed Block.................................................. 841.6 890.6
Amounts included in accumulated other comprehensive income:
Net unrealized investment gains, net of deferred income tax
expense of $25.5 and $43.9 and policyholder dividend
obligation of $292.4 and $242.1................................. 47.4 81.6
----------------- -----------------
Maximum Future Earnings To Be Recognized From Closed Block
Assets and Liabilities............................................ $ 889.0 $ 972.2
================= =================
-14-
Equitable Life Closed Block revenues and expenses were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2004 2003 2004 2003
--------------- ---------------- --------------- ---------------
(IN MILLIONS)
REVENUES:
Premiums and other income............... $ 108.3 $ 118.1 $ 350.6 $ 378.0
Investment income (net of investment
expenses of $.1, $.3, $.4
and $2.0)............................ 134.4 138.1 412.2 416.6
Investment (losses) gains, net.......... (1.5) (10.6) 15.0 (40.7)
--------------- ---------------- --------------- ---------------
Total revenues.......................... 241.2 245.6 777.8 753.9
--------------- ---------------- --------------- ---------------
BENEFITS AND
OTHER DEDUCTIONS:
Policyholders' benefits and dividends... 205.2 215.0 636.3 674.6
Other operating costs and expenses...... 3.9 4.5 12.4 12.9
--------------- ---------------- --------------- ---------------
Total benefits and other deductions..... 209.1 219.5 648.7 687.5
--------------- ---------------- --------------- ---------------
Net revenues before
income tax expense................... 32.1 26.1 129.1 66.4
Income tax expense...................... (11.4) (9.4) (45.9) (24.2)
--------------- ---------------- --------------- ---------------
Net Revenues............................ $ 20.7 $ 16.7 $ 83.2 $ 42.2
=============== ================ =============== ===============
Reconciliation of the policyholder dividend obligation is as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
2004 2003
---------------- ----------------
(IN MILLIONS)
Balances, beginning of year............................................. $ 242.1 $ 213.3
Unrealized investment gains............................................. 50.3 87.3
---------------- ----------------
Balances, End of Period................................................. $ 292.4 $ 300.6
================ ================
MONY Life Closed Block
----------------------
Summarized financial information for the MONY Life Closed Block is as
follows:
-15-
SEPTEMBER 30,
2004
--------------------
(IN MILLIONS)
CLOSED BLOCK LIABILITIES:
Future policy benefits, policyholders' account balances and other.................... $ 7,074.5
Policyholder dividend obligation..................................................... 257.3
Other liabilities.................................................................... 43.3
--------------------
Total Closed Block liabilities....................................................... 7,375.1
--------------------
ASSETS DESIGNATED TO THE CLOSED BLOCK:
Fixed maturities, available for sale, at estimated fair value
(amortized cost of $4,209.8)....................................................... 4,318.7
Mortgage loans on real estate........................................................ 680.5
Policy loans......................................................................... 1,033.6
Cash and other invested assets....................................................... 83.8
Other assets......................................................................... 192.5
--------------------
Total assets designated to the Closed Block......................................... 6,309.1
--------------------
Maximum Future Earnings To Be Recognized From Closed Block
Assets and Liabilities............................................................ $ 1,066.0
====================
MONY Life Closed Block revenues and expenses were as follows:
THREE MONTHS
ENDED
SEPTEMBER 30,
2004
--------------------
(IN MILLIONS)
REVENUES:
Premiums and other income............................................ $ 106.8
Investment income (net of investment expenses of $1.6)............... 84.7
Investment gains (losses), net....................................... 7.6
--------------------
Total revenues....................................................... 199.1
--------------------
BENEFITS AND OTHER DEDUCTIONS:
Policyholders' benefits and dividends................................ 181.2
Other operating costs and expenses................................... 2.9
--------------------
Total benefits and other deductions.................................. 184.1
--------------------
Net revenues before income tax expense............................... 15.0
Income tax expense................................................... (5.2)
--------------------
Net Revenues......................................................... $ 9.8
====================
Reconciliation of the MONY Life policyholder dividend obligation is as
follows:
THREE MONTHS ENDED
SEPTEMBER 30,
2004
-------------------
(IN MILLIONS)
Balance, at acquisition................................................. $ 147.7
Applicable to Net Revenues.............................................. .6
Unrealized investment gains............................................. 109.0
-------------------
Balance, End of Period.................................................. $ 257.3
===================
-16-
9) OTHER DISCONTINUED OPERATIONS
Summarized financial information for Other Discontinued Operations
follows:
SEPTEMBER 30, December 31,
2004 2003
----------------- -----------------
(IN MILLIONS)
BALANCE SHEETS
Fixed maturities, available for sale, at estimated fair value
(amortized cost of $634.4 and $644.7).............................. $ 694.8 $ 716.4
Equity real estate................................................... 187.9 198.2
Mortgage loans on real estate........................................ 34.6 63.9
Other equity investments............................................. 5.9 7.5
Other invested assets................................................ .3 .2
----------------- -----------------
Total investments.................................................. 923.5 986.2
Cash and cash equivalents............................................ 99.7 63.0
Other assets......................................................... 77.9 110.9
----------------- -----------------
Total Assets......................................................... $ 1,101.1 $ 1,160.1
================= =================
Policyholders liabilities............................................ $ 853.5 $ 880.3
Allowance for future losses.......................................... 137.4 173.4
Other liabilities.................................................... 110.2 106.4
----------------- -----------------
Total Liabilities.................................................... $ 1,101.1 $ 1,160.1
================= =================
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
(IN MILLIONS)
STATEMENTS OF EARNINGS
Investment income (net of investment
expenses of $4.4, $4.4, $13.0
and $15.8)............................. $ 16.6 $ 18.1 $ 51.1 $ 54.2
Investment gains, net.................... .7 1.7 4.0 1.9
--------------- --------------- --------------- ---------------
Total revenues........................... 17.3 19.8 55.1 56.1
--------------- --------------- --------------- ---------------
Benefits and other deductions............ 29.1 23.3 79.4 69.7
Losses charged to the allowance for
future losses.......................... (11.8) (3.5) (24.3) (13.6)
---------------- --------------- --------------- ---------------
Pre-tax results from operations.......... - - - -
Pre-tax earnings from releasing the
allowance for future losses............ 7.1 1.0 12.1 1.2
Income tax expense....................... (2.4) (.3) (4.1) (.4)
---------------- --------------- --------------- ---------------
Income from Other Discontinued
Operations............................ $ 4.7 $ .7 $ 8.0 $ .8
================ =============== =============== ===============
AXA Financial's quarterly process for evaluating the allowance for future
losses applies the current period's results of Other Discontinued
Operations against the allowance, re-estimates future losses and adjusts
the allowance, if appropriate. These updated assumptions and estimates
resulted in a release of the allowance in each of the periods presented
above.
Management believes the allowance for future losses at September 30, 2004
is adequate to provide for all future losses; however, the determination
of the allowance involves numerous estimates and subjective judgments
regarding the expected performance of Discontinued Operations Investment
Assets. There can be no assurance the losses provided for will not differ
from the losses ultimately realized. To the extent actual results or
future projections of Other Discontinued Operations differ from
management's current estimates and assumptions underlying the allowance
for future losses, the difference would be reflected in the consolidated
statements of earnings in Other Discontinued Operations. In particular, to
the extent income, sales proceeds
-17-
and holding periods for equity real estate differ from management's
previous assumptions, periodic adjustments to the loss allowance are
likely to result.
Valuation allowances of $1.3 million and $2.5 million on mortgage loans on
real estate were held at September 30, 2004 and December 31, 2003,
respectively.
10) GMDB, GMIB AND NO LAPSE GUARANTEE FEATURES
Variable Annuity Contracts - GMDB and GMIB
Equitable Life, MONY Life and MLOA issue certain variable annuity
contracts with GMDB and GMIB features that guarantee either:
a) Return of Premium: the benefit is the greater of current account
value or premiums paid (adjusted for withdrawals);
b) Ratchet: the benefit is the greatest of current account value,
premiums paid (adjusted for withdrawals), or the highest account
value on any anniversary up to contractually specified ages
(adjusted for withdrawals);
c) Roll-Up: the benefit is the greater of current account value or
premiums paid (adjusted for withdrawals) accumulated at
contractually specified interest rates up to specified ages; or
d) Combo: the benefit is the greater of the ratchet benefit or the
roll-up benefit.
The following table summarizes the GMDB and GMIB liabilities, before
reinsurance ceded, reflected in the General Account in future policy
benefits and other policyholders liabilities in 2004:
GMDB GMIB TOTAL
---------------- ----------------- -----------------
(IN MILLIONS)
Balance at December 31, 2003....................... $ 69.3 $ 85.6 $ 154.9
MONY Life and MLOA balances at acquisition....... 1.1 - 1.1
Paid guarantee benefits.......................... (38.4) - (38.4)
Other changes in reserve......................... 34.1 29.1 63.2
---------------- ----------------- -----------------
Balance at September 30, 2004...................... $ 66.1 $ 114.7 $ 180.8
================ ================= =================
Related GMDB reinsurance ceded amounts were:
GMDB
--------------------
(IN MILLIONS)
Balance at December 31, 2003....................... $ 17.2
MONY Life and MLOA balances at acquisition....... .3
Paid guarantee benefits ceded.................... (10.7)
Other changes in reserve......................... 5.3
--------------------
Balance at September 30, 2004...................... $ 12.1
====================
The GMIB reinsurance contracts are considered derivatives and are reported
at fair value.
The September 30, 2004 values for those variable contracts with GMDB and
GMIB features are presented in the following table. Since variable
contracts with GMDB guarantees may also offer GMIB guarantees in each
contract, the GMDB and GMIB amounts listed are not mutually exclusive:
-18-
RETURN
OF
PREMIUM RATCHET ROLL-UP COMBO TOTAL
------------- ------------- ------------ ----------- ----------
(DOLLARS IN MILLIONS)
GMDB:
-----
Account value (1).............. $ 29,441 $ 7,901 $ 7,781 $ 9,338 $ 54,461
Net amount at risk, gross...... $ 1,833 $ 1,261 $ 2,255 $ 131 $ 5,480
Net amount at risk, net of
amounts reinsured............ $ 1,829 $ 965 $ 1,376 $ 122 $ 4,292
Average attained age of
contractholders.............. 50.1 60.1 62.3 60.2 52.7
Percentage of contractholders
over age 70.................. 7.7% 18.7% 27.6% 20.1% 11.1%
Range of guaranteed minimum
return rates................ N.A. N.A. 3%-6% 3%-6% N.A.
GMIB:
-----
Account value (2).............. N.A. N.A. $ 5,673 $ 12,462 $ 18,135
Net amount at risk, gross...... N.A. N.A. $ 533 $ 0 $ 533
Net amount at risk, net of
amounts reinsured............ N.A. N.A. $ 134 $ 0 $ 134
Weighted average years
remaining until earliest
annuitization............... N.A. N.A. 4.0 9.4 7.3
Range of guaranteed minimum
return rates................ N.A. N.A. 3%-6% 3%-6% N.A.
(1) Included General Account balances of $11,839 million, $600 million,
$144 million and $476 million, respectively, for a total of $13,059
million.
(2) Included General Account balances of $36 million and $648 million,
respectively, for a total of $684 million.
For contracts with the GMDB feature, the net amount at risk in the event
of death as of September 30, 2004 is the amount by which the GMDB benefits
exceed related account values.
For contracts with the GMIB feature, the net amount at risk in the event
of annuitization as of September 30, 2004 is defined as the amount by
which the present value of the GMIB benefits exceeds related account
values, taking into account the relationship between current annuity
purchase rates and the GMIB guaranteed annuity purchase rates.
In 2003, Equitable Life initiated a program intended to hedge certain
risks associated with the GMDB feature of the Accumulator(R) series of
annuity products sold beginning April 2002. In 2004, the program was
expanded to include hedging for certain risks associated with the GMIB
feature of the Accumulator(R) series of annuity products sold beginning
2004. This program currently utilizes exchange-traded futures contracts
that are dynamically managed in an effort to reduce the economic impact of
unfavorable changes in GMDB and GMIB exposures attributable to movements
in the equity and fixed income markets. At September 30, 2004, the total
account value and net amount at risk of contracts were $17,833 million and
$156 million, respectively, for the GMDB hedge program and $1,714 million
and zero, respectively, for the GMIB hedge program.
In third quarter 2004, Equitable Life began to sell variable annuity
contracts with guaranteed minimum withdrawal benefits ("GMWB"). At
September 30, 2004, the reserve for such benefits was zero.
The following table presents the aggregate fair value of assets, by major
investment fund option, held by Separate Accounts that are subject to GMDB
and GMIB benefits and guarantees. Since variable contracts with GMDB
benefits and guarantees may also offer GMIB benefits and guarantees in
each contract, the GMDB and GMIB amounts listed are not mutually
exclusive:
-19-
INVESTMENT IN VARIABLE INSURANCE TRUST MUTUAL FUNDS
SEPTEMBER 30, DECEMBER 31,
2004 2003
---------------- ---------------
(IN MILLIONS)
GMDB:
Equity............................................................... $ 31,077 $ 26,159
Fixed income......................................................... 4,112 3,815
Balanced............................................................. 4,464 2,761
Other................................................................ 1,750 1,497
---------------- ------------------
Total................................................................ $ 41,403 $ 34,232
================ ==================
GMIB:
Equity............................................................... $ 12,694 $ 10,025
Fixed income......................................................... 2,081 2,319
Balanced............................................................. 2,067 725
Other................................................................ 611 711
---------------- ------------------
Total................................................................ $ 17,453 $ 13,780
================ ==================
Variable and Interest-Sensitive Life Insurance Policies - No Lapse
Guarantee
The no lapse guarantee feature contained in variable and
interest-sensitive life insurance policies keeps them in force in
situations where the policy value is not sufficient to cover monthly
charges then due. The no lapse guarantee remains in effect so long as the
policy meets a contractually specified premium funding test and certain
other requirements.
The following table summarizes the no lapse guarantee liabilities
reflected in the General Account in future policy benefits and other
policyholders liabilities, and related reinsurance ceded:
DIRECT REINSURANCE
LIABILITY CEDED NET
----------------- ----------------- -----------------
(IN MILLIONS)
Balance at December 31, 2003....................... $ 37.4 $ - $ 37.4
Impact of adoption of SOP 03-1................... (23.4) - (23.4)
MONY Life and MLOA balances at acquisition....... .5 - .5
Other changes in reserve......................... 4.6 - 4.6
----------------- ----------------- -----------------
Balance at September 30, 2004...................... $ 19.1 $ - $ 19.1
================= ================= =================
11) EMPLOYEE BENEFIT PLANS
AXA Financial sponsors qualified and non-qualified defined benefit plans
covering substantially all employees (including certain qualified
part-time employees), managers and certain agents.
Components of net periodic pension expense (credit) for the qualified and
non-qualified plans follow:
-20-
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
(IN MILLIONS)
Service cost................................. $ 14.9 $ 8.6 $ 36.9 $ 29.6
Interest cost on projected benefit
obligation ................................. 50.6 36.7 124.5 113.3
Expected return on assets.................... (59.1) (46.4) (144.6) (133.9)
Net amortization and deferrals............... 19.9 22.6 59.6 49.8
--------------- --------------- --------------- ---------------
Net Periodic Pension Expense................. $ 26.3 $ 21.5 $ 76.4 $ 58.8
=============== =============== =============== ===============
AXA Financial provides certain postretirement benefits for qualifying
employees, managers and agents retiring from AXA Financial.
Components of net postretirement benefits costs follow:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
(IN MILLIONS)
Service cost................................. $ 1.2 $ 1.0 $ 3.6 $ 3.9
Interest cost on accumulated
postretirement benefit obligation...... 10.2 8.6 27.0 28.6
Net amortization and deferrals............... 1.4 2.0 4.1 3.8
--------------- --------------- --------------- ---------------
Net Periodic Postretirement Benefits Costs... $ 12.8 $ 11.6 $ 34.7 $ 36.3
=============== =============== =============== ===============
AXA Financial sponsors a postemployment health and life insurance
continuation plan for disabled former employees.
Components of net postemployment benefits costs follow:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------------------
2004 2003 2004 2003
-------------- --------------- --------------- ---------------
(IN MILLIONS)
Service cost................................. $ 2.3 $ 2.1 $ 7.0 $ 4.5
Interest cost projected benefit obligation... .8 .4 2.3 1.3
Net amortization and deferrals............... - 7.3 - 7.3
-------------- -------------- --------------- ---------------
Net Periodic Postemployment Benefits
Costs..................................... $ 3.1 $ 9.8 $ 9.3 $ 13.1
============== ============== =============== ===============
12) STOCK APPRECIATION RIGHTS
Following completion of the merger of AXA Merger Corp. with and into the
Holding Company, certain employees exchanged AXA ADR options for tandem
Stock Appreciation Rights and at-the-money AXA ADR options of equivalent
intrinsic value. The maximum obligation for the Stock Appreciation Rights
is $85.6 million, based upon the underlying price of AXA ADRs at January
2, 2001, the closing date of the aforementioned merger. AXA Financial
recorded a (decrease) increase in the Stock Appreciation Rights liability
of $(8.8) million and $.5 million for the third quarter of 2004 and 2003,
and of $(5.6) million and $.7 million for the first nine months of 2004
and 2003, respectively, reflecting the variable accounting for Stock
Appreciation Rights, based on the changes in the market value of AXA ADRs
for the periods then ended. At September 30, 2004, the Stock Appreciation
Rights liability was $7.9 million.
-21-
13) INCOME TAXES
Income taxes for interim periods have been computed using an estimated
annual effective tax rate. This rate is revised, if necessary, at the end
of each successive interim period to reflect the current estimate of the
annual effective tax rate. The effective rate decrease for the nine months
ended September 30, 2004 compared to the six months ended June 30, 2004 is
primarily due to the settlement of state income tax audits.
14) LITIGATION
There have been no new material legal proceedings and no material
developments in specific litigations previously reported in Note 18 of AXA
Financial's Notes to Consolidated Financial Statements for the year ended
December 31, 2003 (the "Litigation Note"), except as described below. On
July 8, 2004 AXA Financial completed its acquisition of The MONY Group
Inc. See Note 1 of Notes to Consolidated Financial Statements contained
herein. Accordingly, this Note includes descriptions of certain legal
proceedings and developments associated with MONY and its subsidiaries.
In AMERICAN NATIONAL BANK, in April 2004, Emerald filed a motion for
summary judgment on liability. Also in April 2004, Emerald filed a motion
to amend its complaint to attempt to cure a defect in diversity
jurisdiction. In April 2004, Equitable Life filed its opposition to this
motion and Emerald filed its reply. In July 2004, the court denied
Emerald's motion and dismissed Emerald's complaint for lack of subject
matter (diversity) jurisdiction. In June 2004, Emerald Investments L.P.
filed a substantially similar complaint as the dismissed action against
Equitable Life, AXA Client Solutions, LLC, and AXA Financial in the United
States District Court for the Northern District of Illinois. In July 2004,
Emerald filed an amended complaint, to which Equitable Life filed an
answer asserting several affirmative defenses: Equitable Life also filed a
partial motion to dismiss the amended complaint. In August 2004, Emerald
filed a motion to dismiss several affirmative defenses, which motion was
granted in September 2004.
In the action Equitable Life commenced against Emerald in December 2001,
the court granted Emerald's motion for summary judgment in March 2004. In
July 2004, Equitable Life filed a motion to dismiss this action on the
ground that there is no subject matter (diversity) jurisdiction. In
September 2004, the court dismissed Equitable Life's action and retained
jurisdiction over Emerald's counterclaims in that action.
In DH2, the complaint was served on Equitable Life and EQ Advisors Trust
in May 2004. In July 2004, DH2 filed an amended complaint adding the
individual trustees as defendants. In October 2004, all defendants filed a
motion to dismiss the amended complaint.
In FISCHEL, in April 2004, the District Court denied Equitable Life's
motion for reconsideration. In May 2004, the Ninth Circuit entered an
order directing the District Court to award plaintiffs' counsel certain of
their attorneys' fees in connection with the previous settlement of a
second count of the complaint which is unrelated to the health benefits
claims that remain before the court. Equitable Life will pay those
attorneys' fees out of a settlement fund already set aside as part of that
previous settlement. Following its decision to deny the motion for
reconsideration, the District Court scheduled a hearing for September 2004
to address the relief that plaintiffs are entitled to on the health
benefits claims. Notice of a pending settlement was sent October 15, 2004.
The fairness hearing has been set for November 2004.
In HIRT, in July 2004, the parties filed cross motions for summary
judgment asking the court to find in their respective favors on
plaintiffs' claim that (1) the cash balance formula of the retirement plan
violates ERISA's age discrimination provisions and (2) the notice of plan
amendment distributed by Equitable Life violated ERISA's notice rules.
Following a hearing on the motions, the court ordered a limited amount of
additional discovery to be conducted followed by a subsequent hearing.
In BERGER, in March 2004, the District Court entered an order certifying a
class consisting of "[a]ll present, former and retired Equitable agents
who (a) lost eligibility for benefits under any Equitable ERISA plan
during any period on or after January 1, 1999 because of the application
of the policy adopted by Equitable of using compliance with specified
sales goals as the test of who was a "full time life insurance salesman"
and thereby eligible for benefits under any such plan, or (b) remain
subject to losing such benefits in the future because of the potential
application to them of that policy." Discovery has concluded. It is
expected that the parties will file cross motions for summary judgment.
The case has been removed from the trial calendar pending a decision on
these motions.
-22-
In ECKERT, in June 2004, plaintiff, in connection with a settlement of a
proceeding entitled ECKERT V. AXA ADVISORS, LLC, ET AL. filed with the
National Association of Securities Dealers, Inc., released his putative
class action claim against the Company. In June 2004, Plaintiff's counsel
filed a motion for withdrawal of plaintiff from the putative class action
lawsuit and intervention by another member of the putative class as
plaintiff.
In the MONY STOCKHOLDER LITIGATION, on April 6, 2004, the Delaware Court
of Chancery heard plaintiffs' second preliminary injunction motion,
brought on the basis of the new allegations in their second amended
complaint. In their motion, plaintiffs sought an order (i) enjoining AXA
Financial and MONY's directors and officers from voting their shares at
the May 18, 2004 MONY shareholder meeting, (ii) compelling additional
disclosure by MONY, and (iii) enjoining MONY from counting the votes cast
by shareholders on proxy cards submitted in connection with the original
February 24, 2004 shareholder meeting date (the "original proxies"). On
April 9, 2004, Vice Chancellor Lamb denied plaintiffs' motion and granted
summary judgment to defendants on the issue regarding the legal validity
of the original proxies. On April 14, 2004, plaintiffs filed a motion to
expedite the proceedings and to schedule a hearing on a third motion for a
preliminary injunction regarding the use by MONY of the original proxies.
Prior to the scheduling of a hearing on the plaintiffs' third motion for a
preliminary injunction, the parties engaged in arms-length negotiations
concerning a possible settlement of the litigation. Those negotiations
resulted in the execution of a Memorandum of Understanding dated May 17,
2004, which set forth the terms of an agreement in principle to settle the
litigation, subject to, among other things, certification of a class for
settlement purposes, release of claims against all defendants and
plaintiffs' participation in the preparation of, and monitoring compliance
with, agreed procedures for the tabulation of proxies cast by retail
shareholders at the May 18, 2004 MONY shareholder meeting. On or about
July 13, 2004, counsel for the parties executed a Stipulation of
Settlement setting forth the terms of a definitive settlement, subject to,
among other things, approval by the Delaware Chancery Court. On July 13,
2004, the parties filed the Stipulation of Settlement with the Delaware
Chancery Court and requested that the Court schedule a hearing to approve
the settlement and authorize notice of the terms of the Stipulation of
Settlement, the date of the hearing, and the procedures for class members
to object to the settlement. On July 19, 2004, the Delaware Chancery Court
entered an order, among other things, certifying a class for settlement
purposes only and scheduling a hearing on the fairness of the proposed
settlement for September 28, 2004.
As scheduled, on September 28, 2004, the Delaware Court of Chancery held a
hearing on the fairness of a proposed settlement of the litigation agreed
to by the parties. In an order dated October 2, 2004, the court approved
the settlement, and for purposes of the settlement certified a class of
MONY stockholders, determined that the settlement was fair, reasonable and
in the best interests of the class members, dismissed all claims against
all defendants with prejudice, and awarded attorneys' fees to counsel for
the Delaware plaintiffs in an amount defendants previously had agreed not
to oppose. In the NORTH BORDER case in New York State Supreme Court, on or
about September 24, 2004, the plaintiff agreed that it would not object to
the proposed settlement before the Delaware Court of Chancery and that
following a final judgment approving the settlement by the Delaware Court
of Chancery, the plaintiff would dismiss its action against all defendants
with prejudice.
On or about September 30, 2004, a petition for appraisal entitled CEDE &
CO. V. AXA FINANCIAL, INC. was filed in the Delaware Court of Chancery by
an alleged former MONY stockholder. The petition seeks a judicial
appraisal of the value of the MONY shares held by former MONY stockholders
who demanded appraisal pursuant to Section 262 of the General Corporation
Law of the State of Delaware and have not withdrawn their demands. The
parties are engaged in discovery. On or about November 4, 2004, a petition
for appraisal entitled HIGHFIELDS CAPITAL LTD. V. AXA FINANCIAL, INC. was
filed in the Delaware Court of Chancery by another alleged former MONY
stockholder. The relief sought by the Highfields Capital petition is
substantially identical to that sought pursuant to the Cede & Co.
petition.
In April 2004, a purported nationwide class action lawsuit was filed in
the Circuit Court for Madison County, Illinois entitled MATTHEW WIGGENHORN
V. EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES. The lawsuit
alleges that Equitable Life uses stale prices of the foreign securities
within the investment divisions of its variable insurance products. The
complaint further alleges that Equitable Life's use of stale pricing
diluted the returns of the purported class. The complaint also alleges
that Equitable Life breached its fiduciary duty to the class by allowing
market timing in general within Equitable Life's variable insurance
products, thereby diluting the returns of the class. The lawsuit asserts
causes of action for negligence, gross negligence, breach of contract, and
breach of fiduciary duty and seeks unspecified compensatory and punitive
damages, plus prejudgment interest, attorneys' fees and costs. In June
2004, Equitable Life removed the case to Federal court and in July 2004
filed a motion to dismiss. In July 2004, plaintiff filed a motion to
remand the action to state court. In August 2004, the court stayed the
action pending a decision by the U.S. Court of Appeals for the Seventh
Circuit in a case filed against Putnam Funds et al. (to which AXA
Financial is not a party) regarding removal pursuant to the Securities
Litigation Uniform Standards Act under similar circumstances.
-23-
Since late 1995 a number of purported class actions have been commenced in
various state and Federal courts against MONY Life and MLOA alleging that
they engaged in deceptive sales practices in connection with the sale of
whole and universal life insurance policies from the early 1980s through
the mid 1990s. Although the claims asserted in each case are not
identical, they seek substantially the same relief under essentially the
same theories of recovery (i.e., breach of contract, fraud, negligent
misrepresentation, negligent supervision and training, breach of fiduciary
duty, unjust enrichment and/or violation of state insurance and/or
deceptive business practice laws). Plaintiffs in these cases seek
primarily equitable relief (e.g., reformation, an accounting, specific
performance, mandatory injunctive relief prohibiting MONY Life and MLOA
from canceling policies for failure to make required premium payments,
imposition of a constructive trust and/or creation of a claims resolution
facility to adjudicate any individual issues remaining after resolution of
all class-wide issues) as opposed to compensatory damages, although they
also seek compensatory damages in unspecified amounts. MONY Life and MLOA
have answered the complaints in each action (except for one being
voluntarily held in abeyance). MONY Life and MLOA have denied any
wrongdoing and have asserted numerous affirmative defenses.
In June 1996, the New York State Supreme Court certified one of those
cases, GOSHEN V. THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK AND MONY
LIFE INSURANCE COMPANY OF AMERICA (NOW KNOWN AS DEFILIPPO, ET AL V. THE
MUTUAL LIFE INSURANCE COMPANY OF NEW YORK AND MONY LIFE INSURANCE COMPANY
OF AMERICA), the first of the class actions filed as a nationwide class
consisting of all persons or entities who have, or at the time of the
policy's termination had, an ownership interest in a whole or universal
life insurance policy issued by MONY Life and MLOA and sold on an alleged
"vanishing premium" basis during the period January 1, 1982 to December
31, 1995. In March 1997, MONY Life and MLOA filed a motion to dismiss or,
alternatively, for summary judgment on all counts of the complaint. With
the exception of one putative class action currently pending in the
Eastern District of Michigan (Stockler v. MONY Life Insurance Company of
America), all other putative class actions have been consolidated and
transferred by the Judicial Panel on Multidistrict Litigation to the
United States District Court for the District of Massachusetts. While most
of the cases before the District Court have been held in abeyance pending
the outcome in Goshen, in June 2003, the Court granted plaintiffs in two
of the constituent cases (the McLean and Snipes cases) leave to amend
their complaints to delete all class action claims and allegations other
than (in the case of McLean) those predicated on alleged violations of the
Massachusetts and Illinois consumer protection statutes. In November 2003
the Court in McLean entered an order granting defendants' motion for
summary judgment on res judicata grounds as to the individual claims of
the proposed class representatives of the putative statewide class
comprised of Massachusetts purchasers, but denied the motion on statute of
limitations grounds as to the individual claims of the proposed class
representatives of the putative state wide class of Illinois purchasers
only.
In October 1997 the New York State Supreme Court granted MONY Life's and
MLOA's motion for summary judgment and dismissed all claims filed in the
Goshen case against MONY Life and MLOA. In December 1999, the New York
State Court of Appeals affirmed the dismissal of all but one of the claims
in the Goshen case (a claim under New York's General Business Law), which
was remanded back to the New York State Supreme Court for further
proceedings consistent with the opinion. The New York State Supreme Court
subsequently reaffirmed that, for purposes of the remaining New York
General Business Law claim, the class is now limited to New York
purchasers only. In July 2002, the New York Court of Appeals affirmed the
New York State Supreme Court's decision limiting the class to New York
purchasers. In addition, the New York State Supreme Court has further held
that the New York General Business Law claims of all class members whose
claims accrued prior to November 29, 1992 are barred by the applicable
statute of limitations. In September 2002 in light of the New York Court
of Appeals' decision, MONY Life and MLOA filed a motion to decertify the
class with respect to the sole remaining claim in the case. By orders
entered in April and May 2003, the New York State Supreme Court denied
preliminarily the motion for decertification, but held the issue of
decertification in abeyance pending appeals by plaintiffs in related cases
and a hearing on whether the present class, or a modified class, can
satisfy the requirements of the class action statute in New York. MONY
Life and MLOA have appealed from the denial of their motion for
decertification, which appeal is presently pending in the Appellate
Division, First Department. MONY Life and MLOA intend to defend themselves
vigorously against the sole remaining claim.
Although the outcome of litigation cannot be predicted with certainty, AXA
Financial's management believes that the ultimate resolution of the
matters described above should not have a material adverse effect on the
consolidated financial position of AXA Financial. AXA Financial's
management cannot make an estimate of loss, if any, or predict whether or
not such litigations will have a material adverse effect on AXA
Financial's consolidated results of operations in any particular period.
-24-
ALLIANCE LITIGATIONS
In BENAK, plaintiffs have not filed a notice of appeal.
In the SEBI matter with Mr. Arora, in March 2004, SEBI issued a final
order against Mr. Arora barring him from dealing directly or indirectly in
the Indian securities markets for a period of five years commencing August
9, 2003. In October 2004, SAT allowed Mr. Arora's appeal and set aside
SEBI's impugned order. SEBI has appealed the SAT's decision to the Supreme
Court of India. In October 2004, ACAML agreed to transfer the management
rights with respect to its local Indian mutual funds to Birla Sun Life, an
Indian asset management company.
In the SEBI matter with Alliance, in May 2004, SEBI issued an Order of
Adjudicating Officer in respect of Alliance, ACAML and its local Indian
mutual fund whereby it levied a fine, jointly and severally, against
Alliance and ACAML in an amount of approximately $630,000 for not filing
the required notices in a timely manner. In June 2004, Alliance and ACAML
filed an appeal with respect to such order with SAT, which is still
pending.
In August 2004, SEBI entered an order of adjudication against ACAML, its
local mutual fund and Alliance for violations of Section 15G and 15HA of
the SEBI Act. The order states that a portfolio manager of ACAML relied
upon unpublished price sensitive information in making certain investment
decisions on behalf of certain clients of ACAML and Alliance and that
during various time periods he engaged in manipulative trading activity
with respect to certain other securities. Alliance and ACAML intend to
file an appeal with respect to the order with SAT. SEBI imposed a penalty
of R.S. 150,000,000 (approximately $3,200,000) jointly and severally on
ACAML and Alliance. Alliance and ACAML filed an appeal with respect to the
order with SAT in October 2004, and a hearing before SAT has been
scheduled for November 2004.
The allegations against Alliance and ACAML contained in these orders of
adjudication were largely based on the alleged actions of Mr. Arora, for
which Alliance and ACAML were allegedly responsible. These alleged actions
were the subject of SEBI's order against Mr. Arora, which has now been set
aside. Alliance believes that if the setting aside of SEBI's order against
Mr. Arora is not overturned on appeal, it should substantially strengthen
Alliance's legal position in its appeal of the SEBI orders against
Alliance and ACAML.
In ERB, in June 2004, plaintiff filed an amended complaint ("Amended Erb
Complaint") in the Circuit Court of St. Clair County, Illinois. The
Amended Erb Complaint allegations are substantially similar to those
contained in the previous complaint; however, the Amended Erb Complaint
adds a new plaintiff and seeks to allege claims on behalf of a purported
class of persons or entities holding an interest in any portfolio managed
by Alliance's Large Cap Growth Team. The Amended Erb Complaint alleges
that Alliance breached its contracts with these persons or entities by
impermissibly purchasing shares of stocks that were not 1-rated.
Plaintiffs seek rescission of all purchases of any non-1-rated stocks
Alliance made for Premier Growth Fund and other Large Cap Growth Team
clients' portfolios over the past eight years, as well as an unspecified
amount of damages. In July 2004, Alliance removed the ERB action to the
United States District Court for the Southern District of Illinois on the
basis that plaintiffs' claims are preempted under the Securities
Litigation Uniform Standards Act. In August 2004, the District Court
remanded the action to the Circuit Court. In September 2004, Alliance
filed a notice of appeal with respect to the District Court's order. That
motion is pending.
In the SBA Complaint matter, in November 2003, the SBA filed an amended
complaint ("Amended SBA Complaint"). The Amended SBA Complaint contains
Enron-related claims similar to the previous complaint and also alleges
that Alliance breached its contract with the SBA by investing in or
continuing to hold stocks for the SBA's investment portfolio that were not
"1-rated," the highest rating that Alliance's research analysts could
assign. The Amended SBA Complaint also added claims for negligent
supervision and common law fraud. The Amended SBA Complaint seeks
rescissionary damages for all purchases of stocks that were not 1-rated,
as well as damages for those that were not sold on a downgrade. The SBA
has asserted in discovery that its damages (including statutory interest)
are approximately $2.9 billion. In December 2003, Alliance moved to
dismiss the fraud and breach of fiduciary duty claims in the Amended SBA
Complaint. In January 2004, the court denied that motion. The case is
currently in discovery. The trial is scheduled to commence on March 7,
2005.
Market Timing-Related Matters
Regulatory
On September 1, 2004, Alliance and the Attorney General of the State of
New York ("NYAG") entered into an Assurance of Discontinuance relating to
Alliance's settlement of investigations into trading practices in certain
Alliance-sponsored mutual funds ("NYAG Agreement"). Alliance reached terms
with the SEC and the NYAG regarding these practices on December 18, 2003.
The agreement with the SEC was reflected in an Order of the Commission,
while the agreement with the NYAG was subject to completion of final,
definitive documentation. Alliance's settlement terms with both the SEC
and the NYAG were described in a News Release dated December 18, 2003,
which Alliance furnished under a Current Report on Form 8-K. The
-25-
NYAG Agreement, the material terms of which document and confirm the terms
previously described, is the final, definitive documentation referenced in
such Release.
Civil Litigation
In the MUTUAL FUND TRADING LITIGATIONS (i.e., the HINDO Complaint and
similar lawsuits), three lawsuits making factual allegations generally
similar to those in the HINDO Complaint have been filed against Alliance
and certain other defendants in addition to the forty such lawsuits
already reported in the Litigation Note. As a result, since October 3,
2003, forty-three lawsuits, in addition to the HINDO Complaint, have been
filed in various Federal and state courts. AXA Financial is named as a
defendant, primarily as a control person of Alliance, in thirty-five of
these lawsuits (including the HINDO Complaint). All of these lawsuits seek
an unspecified amount of damages.
On February 20, 2004, the Judicial Panel on Multidistrict Litigation ("MDL
Panel") transferred all Federal actions to the United States District
Court for the District of Maryland ("Mutual Fund MDL"). On March 3, 2004
and April 6, 2004, the MDL Panel issued orders conditionally transferring
the state court cases against Alliance and numerous others to the Mutual
Fund MDL. Transfer of all of these actions subsequently became final.
Plaintiffs in three of these four actions moved to remand the actions back
to state court. On June 18, 2004, the Court issued an interim opinion
deferring decision on plaintiffs' motions to remand until a later stage in
the proceedings. Subsequently, the plaintiff in the state court individual
action moved the Court for reconsideration of that interim opinion and for
immediate remand of her case to state court, and that motion is pending.
Defendants are not yet required to respond to the complaints filed in the
state court derivative actions.
On September 29, 2004, plaintiffs filed consolidated amended complaints
with respect to four claim types: mutual fund shareholder claims; mutual
fund shareholder derivative claims; Alliance Holding unitholder derivative
claims; and claims brought under ERISA by participants in the Profit
Sharing Plan for Employees of Alliance. All four complaints include
substantially identical factual allegations, which appear to be based in
large part on the SEC Order. The claims in the mutual fund derivative
consolidated amended complaint are generally based on the theory that all
fund advisory agreements, distribution agreements and 12b-1 plans between
Alliance and the AllianceBernstein Funds should be invalidated, regardless
of whether market timing occurred in each individual fund, because each
was approved by fund trustees on the basis of materially misleading
information with respect to the level of market timing permitted in funds
managed by Alliance. The claims asserted in the other three consolidated
amended complaints are similar to those that the respective plaintiffs
asserted in their previous Federal lawsuits. AXA Financial, AXA S.A. and
Equitable Life are named as defendants in the mutual fund shareholder
complaint and the Alliance Holding unitholder derivative complaint. Claims
have been asserted against all these companies that include both control
person and direct liability. AXA Financial is named as a defendant in the
mutual fund complaint and the ERISA complaint.
Alliance recorded charges to income totaling $330 million during the
second half of 2003 in connection with establishing a $250 million
restitution fund, as described in the Litigation Note. During the first
nine months of 2004, Alliance paid $293 million related to these matters
(including $250 million to a restitution fund) and has cumulatively paid
$299 million. Alliance's management, however, cannot determine at this
time the eventual outcome, timing or impact of these matters. Accordingly,
it is possible that additional charges in the future may be required.
Revenue Sharing-Related Matters
Regulatory
Alliance and approximately twelve other investment management firms were
publicly mentioned in connection with the settlement by the SEC of charges
that Morgan Stanley violated Federal securities laws relating to its
receipt of compensation for selling specific mutual funds and the
disclosure of such compensation. The SEC has indicated publicly that,
among other things, it is considering enforcement action in connection
with mutual funds' disclosure of such arrangements and in connection with
the practice of considering mutual fund sales in the direction of
brokerage commissions from fund portfolio transactions. The SEC and the
NASD have issued subpoenas to Alliance in connection with this matter and
Alliance has provided documents and other information to the SEC and the
NASD, and is cooperating fully with their investigations.
Civil Litigation
On June 22, 2004, a purported class action complaint entitled AUCOIN, ET
AL. V. ALLIANCE CAPITAL MANAGEMENT L.P., ET AL. ("AUCOIN Complaint") was
filed against Alliance, Alliance Holding, ACMC, AXA Financial, ABIRM,
certain current and former directors of the AllianceBernstein Funds, and
unnamed Doe defendants. The AUCOIN Complaint names the AllianceBernstein
Funds as nominal defendants. The AUCOIN Complaint also names AXA Financial
as a defendant as a control person of Alliance under the Federal
securities laws. The AUCOIN Complaint was filed in the United States
District Court for the Southern District of New York by an alleged
shareholder of the AllianceBernstein Growth & Income Fund. The AUCOIN
Complaint alleges, among other things, (i) that certain of the defendants
improperly authorized the payment of excessive commissions and other fees
from AllianceBernstein Fund assets to broker-dealers in exchange for
preferential marketing services, (ii) that certain of the defendants
misrepresented and omitted from registration statements and other reports
material facts concerning such payments, and (iii) that certain defendants
caused such
-26-
conduct as control persons of other defendants. The AUCOIN Complaint
asserts claims for violation of Sections 34(b), 36(b) and 48(a) of
the ICA, Sections 206 and 215 of the Advisers Act, breach of common law
fiduciary duties, and aiding and abetting breaches of common law fiduciary
duties. Plaintiffs seek an unspecified amount of compensatory damages and
punitive damages, rescission of their contracts with Alliance, including
recovery of all fees paid to Alliance pursuant to such contracts, an
accounting of all AllianceBernstein Fund-related fees, commissions and
soft dollar payments, and restitution of all unlawfully or
discriminatorily obtained fees and expenses.
Since June 22, 2004, nine additional lawsuits making factual allegations
substantially similar to those in the Aucoin Complaint were filed against
Alliance and certain other defendants (including AXA Financial), and
others may be filed. All nine of the lawsuits (i) were brought as class
actions filed in the United States District Court for the Southern
District of New York, (ii) assert claims substantially identical to the
AUCOIN Complaint and (iii) are brought on behalf of shareholders of
AllianceBernstein Funds.
With respect to certain matters discussed under "Alliance Litigations"
either herein or in the Litigation Note (other than the MUTUAL FUND
TRADING LITIGATIONS and the SEBI matters), management of Alliance is
unable to estimate the impact, if any, that the outcome of these matters
may have on Alliance's results of operations or financial condition and
AXA Financial's management is unable to estimate the impact, if any, that
the outcome of these matters may have on AXA Financial's results of
operations or financial position.
In addition to the matters previously reported and those described above,
the Holding Company and its subsidiaries are involved in various legal
actions and proceedings in connection with their businesses. Some of the
actions and proceedings have been brought on behalf of various alleged
classes of claimants and certain of these claimants seek damages of
unspecified amounts. While the ultimate outcome of such matters cannot be
predicted with certainty, in the opinion of management no such matter is
likely to have a material adverse effect on AXA Financial's consolidated
financial position or results of operations. However, it should be noted
that the frequency of large damage awards, including large punitive damage
awards that bear little or no relation to actual economic damages incurred
by plaintiffs in some jurisdictions, continues to create the potential for
an unpredictable judgment in any given matter.
15) BUSINESS SEGMENT INFORMATION
The following tables reconcile segment revenues and earnings from
continuing operations before Federal income taxes and minority interest to
total revenues and earnings as reported on the consolidated statements of
earnings and segment assets to total assets on the consolidated balance
sheets, respectively.
-27-
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ----------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ----------------
(IN MILLIONS)
SEGMENT REVENUES:
Financial Advisory/Insurance............ $ 1,928.8 $ 1,207.3 $ 4,725.7 $ 3,573.8
Investment Management................... 720.1 698.2 2,206.1 1,974.4
Consolidation/elimination............... (21.8) (18.7) (62.9) (51.7)
--------------- --------------- --------------- ----------------
Total Revenues.......................... $ 2,627.1 $ 1,886.8 $ 6,868.9 $ 5,496.5
=============== =============== =============== ================
SEGMENT EARNINGS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST:
Financial Advisory/Insurance............ $ 158.1 $ 169.9 $ 703.9 $ 404.3
Investment Management................... 141.7 1.3 449.5 227.2
Consolidation/elimination (1.6) - (2.1) -
--------------- --------------- --------------- ----------------
Total Earnings from Continuing
Operations before Income Taxes
and Minority Interest................ $ 298.2 $ 171.2 $ 1,151.3 $ 631.5
=============== =============== =============== ================
SEPTEMBER 30, December 31,
2004 2003
---------------- ------------------
(IN MILLIONS)
ASSETS:
Financial Advisory/Insurance............................................ $ 125,061.3 $ 99,382.3
Investment Management................................................... 14,265.1 15,750.2
Consolidation/elimination............................................... 2.5 56.7
---------------- ------------------
Total Assets............................................................ $ 139,328.9 $ 115,189.2
================ ==================
16) STOCK-BASED COMPENSATION
AXA Financial accounts for stock-based compensation using the intrinsic
value method prescribed in APB No. 25. Compensation expense is not
reflected in the statement of earnings for options granted under the
Holding Company's Stock Incentive Plans as all such options had an
exercise price equal to the market value of the underlying common stock on
the date of the grant and vest solely with the passage of time. The
following table illustrates the effect on net income if compensation
expense as related to options awarded under those plans had been
determined based on SFAS No. 123's fair value based method:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------------
2004 2003 2004 2003
-------------- ------------- --------------- ---------------
(IN MILLIONS)
Net earnings as reported................... $ 196.3 $ 109.7 $ 726.0 $ 347.8
Less: Total stock-based employee
compensation expense determined under
fair value method for all awards, net
of income tax benefit.................. $ (6.8) (9.5) (21.6) (27.0)
-------------- ------------- ----------------- ---------------
Pro Forma Net Earnings..................... $ 189.5 $ 100.2 $ 704.4 $ 320.8
============== ============= ================= ===============
-28-
17) COMPREHENSIVE INCOME
The components of comprehensive income for third quarter 2004 and 2003 and
the first nine months of 2004 and of 2003 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
(IN MILLIONS)
Net earnings............................. $ 196.3 $ 109.7 $ 726.0 $ 347.8
--------------- --------------- --------------- ---------------
Change in unrealized gains (losses),
net of reclassification adjustment..... 387.2 (194.4) 26.4 329.4
Cumulative effect of accounting
changes .............................. - - 12.4 -
Minimum pension liability adjustment..... - - - 5.4
--------------- --------------- --------------- ---------------
Other comprehensive (loss) income........ 387.2 (194.4) 38.8 334.8
--------------- --------------- --------------- ---------------
Comprehensive Income(Loss)............... $ 583.5 $ (84.7) $ 764.8 $ 682.6
=============== =============== =============== ===============
18) DISCONTINUED INVESTMENT BANKING AND BROKERAGE SEGMENT
In June 2004, AXA Financial recorded a gain on disposal of the
discontinued Investment Banking and Brokerage segment of $53.2 million,
net of Federal income taxes of $28.7 million. The gain resulted from the
reduction of state tax liabilities related to the 2000 sale of Donaldson,
Lufkin & Jenrette, Inc.
19) SUBSEQUENT EVENT
On October 28, 2004, Alliance announced that Alliance and Federated
Investors, Inc. ("Federated") had reached a definitive agreement for
Federated to acquire Alliance's cash management business. Under the
agreement, Federated will acquire the assets under management of 22
third-party-distributed money market funds of AllianceBernstein Cash
Management Services, which totaled approximately $29 billion at September
30, 2004. The transaction will not include the assets of AllianceBernstein
Exchange Reserves, Inc., which will continue to be available to investors
in other AllianceBernstein mutual funds. In addition, Alliance will
continue to meet the liquidity needs of investors in its private client,
managed account and institutional investment management businesses. The
capital gain, net of income taxes and minority interest, that would be
recognized upon the closing of the transaction in 2005 is not expected to
be material to AXA Financial. Estimated contingent payments received from
Federated in the five years following the closing are expected to be
similar in amount to the business's anticipated profit contribution over
that period. The overall effect on earnings is, therefore, expected to be
immaterial.
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis is omitted pursuant to General Instruction
H of Form 10-Q. The management narrative for AXA Financial that follows should
be read in conjunction with the Consolidated Financial Statements, the related
Notes to Consolidated Financial Statements and the information discussed under
Forward-Looking Statements included in this Form 10-Q, and with the management
narrative found in the Management's Discussion and Analysis ("MD&A") section
included in AXA Financial's Annual Report on Form 10-K for the year ended
December 31, 2003 ("2003 Form 10-K").
CONSOLIDATED RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
The consolidated results of operations for the nine months ended September 30,
2004 discussed in the following paragraphs include the results of the MONY
companies for third quarter 2004. The MONY companies' results are included in
the Financial Advisory/Insurance segment.
Earnings from continuing operations before income taxes and minority interest
were $1.15 billion for the first nine months of 2004, an increase of $519.8
million from the 2003 period, with $299.6 million and $222.3 million higher
earnings reported by the Financial Advisory/Insurance and Investment Management
segments, respectively. Net earnings for AXA Financial totaled $726.0 million
for the first nine months of 2004, up $378.2 million from the 2003 period. Net
earnings for the 2004 period included a $53.2 million net gain related to a
reduction of certain state tax liabilities associated with the 2000 sale of
Donaldson, Lufkin and Jenrette, Inc., reported as discontinued operations. In
third quarter 2004, a post-tax gain of $10.9 million was recognized on the sale
of real estate held-for-sale, reported as discontinued operations. In first
quarter 2004, AXA Financial recorded a $4.0 million charge (net of related
income taxes of $2.2 million) for the cumulative effect of the January 1, 2004
adoption of SOP 03-1.
Revenues. Total revenues for the first nine months of 2004 increased $1.37
billion as revenues for both the Financial Advisory/Insurance, which included
MONY revenues of $497.2 million, and Investment Management segments increased
$1.15 billion and $231.7 million, respectively, as compared to the first nine
months of 2003.
Policy fee income was $1.22 billion, $218.2 million higher than in the 2003
period, largely due to higher average Separate Account balances resulting from
market appreciation and positive net cash flows. Premiums totaled $849.6 million
for the first nine months of 2004, $188.1 million higher than in the 2003
period, principally due to the $169.5 million addition of MONY premiums in third
quarter 2004.
Net investment income increased $255.4 million to $2.05 billion, of which $136.1
million was attributed to the MONY companies in third quarter 2004. The
remainder of the increase was principally due to a higher level of assets in the
General Account, $84.6 million higher earnings from other equity investments due
to market improvement and prepayment gains of $25.6 million partially offset by
lower yields due to lower reinvestment rates and overall losses of $31.9 million
on derivative instruments including unrealized depreciation on interest rate
swap contracts as compared to income of $13.5 million in the 2003 period.
Investment gains, net totaled $53.1 million in the 2004 period ($5.8 million of
which related to the MONY companies) compared to net losses of $93.2 million in
the first nine months of 2003 principally due to lower writedowns on fixed
maturities partially offset by lower gains on sales of fixed maturities. Net
gains on sales of Equitable Life General Account fixed maturities were $53.5
million for the first nine months of 2004 as compared to $58.4 million in the
2003 period while writedowns on the fixed maturity portfolio of the Equitable
Life General Account totaled $33.9 million for the 2004 period compared to
$182.0 million for the prior year period.
There was a $564.4 million increase in commissions, fees and other income to
$2.70 billion in the first nine months of 2004 from $2.14 billion in the 2003
period. The $223.2 million higher fees in the Investment Management segment were
primarily due to the $185.3 million increase in Alliance's investment advisory
and services fees to $1.52 billion due to an approximately 17.3% increase in
average AUM, an increase in brokerage transaction charges due to higher
transaction volume and a $7.1 million performance based institutional investment
management fee, partially offset by approximately $53 million in revenue
reductions. These reductions resulted from reductions in advisory fees
implemented for certain Alliance-sponsored retail mutual funds in connection
with the settlement of
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market timing-related matters. Distribution revenues at Alliance were $336.9
million in the first nine months of 2004, $15.6 million higher than in the
comparable 2003 period primarily due to higher average mutual fund AUM. When
compared to the first nine months of 2003, there was a $25.7 million increase in
revenues from institutional research services due to higher market share and
higher revenues from growth in European operations partially offset by a
decrease in NYSE trading volume and pricing. The increase of $350.8 million in
the Financial Advisory/Insurance segment in the first nine months of 2004 was
primarily due to the $55.0 million increase in the fair value of the GMIB
reinsurance contracts in the 2004 period as compared to the $58.0 million
decrease in fair value in the 2003 period and higher gross investment management
fees received from EQAT and VIP Trust due to a higher asset base and to higher
fees related to higher mutual fund sales, in addition to the $131.0 million
attributed to the MONY companies.
Benefits and Other Deductions. Total benefits and other deductions increased
$852.6 million to $5.72 billion for the first nine months of 2004 as the
Financial Advisory/Insurance and the Investment Management segments posted
increases of $852.3 million and $9.4 million, respectively. The MONY companies
accounted for $495.1 million of the Financial Advisory/Insurance increase.
The policyholders' benefits increase of $380.8 million to $1.65 billion in the
first nine months of 2004 principally resulted from the inclusion of the MONY
companies' $247.5 million total as well as higher GMDB/GMIB benefits and
reserves due to growth in the business, higher individual life death claims and
higher benefits and reserves in the reinsurance assumed product line due to an
increase in reserves under one life reinsurance agreement and third quarter 2004
of $40.5 million, partially offset by lower policyholder dividends due to
reductions in the dividend scale in the Equitable Life Insurance Group.
The $96.5 million increase in interest credited to policyholders' account
balances to $819.5 million in the first nine months of 2004 was principally due
to higher account balances and the changes in the fair value of the investment
asset portfolio supporting group pension annuity participating contracts that
resulted from the implementation of SOP 03-1, partially offset by the impact of
lower crediting rates in the Equitable Life Insurance Group. The MONY companies
contributed $36.9 million to the increase.
When compared to the first nine months of 2003, there was a $274.0 million
increase in compensation and benefits in the first nine months of 2004 to $1.53
billion, with $150.6 million higher expenses in the Investment Management
segment and a $123.6 million net increase in the Financial Advisory/Insurance
segment. The increase in compensation and benefits in the Investment Management
segment was due to higher Alliance incentive compensation reflecting the impact
the charge for legal proceedings and mutual fund matters had in third quarter
2003 and higher commissions, primarily in the private client channel. The net
increase in compensation and benefit costs in the Financial Advisory/Insurance
segment was principally due to $100.7 million expenses in third quarter 2004
related to the MONY companies, $45.6 million in severance benefits associated
with staff reductions resulting from the MONY integration and higher benefit
costs partially offset by a $32.7 million decrease in salaries for the Equitable
Life Insurance Group. Additionally, compensation and benefits for the Financial
Advisory/Insurance segment included a $5.6 million credit resulting from changes
in the Stock Appreciation Rights' liability in the 2004 period as compared to
$0.7 million of expenses in the comparable 2003 period.
Commissions increased $57.1 million during the first nine months of 2004 to
$637.8 million due primarily to the inclusion of the MONY companies in third
quarter 2004.
The Investment Management segment's distribution plan payments totaled $280.3
million for the first nine months of 2004, up $4.6 million from the 2003
period's payments, while amortization of deferred sales commissions was $138.5
million, $19.3 million lower than in the first nine months of 2003 primarily due
to declines in net amortizable assets due to lower U.S. sales.
DAC and VOBA amortization increased $33.2 million to $315.5 million for the
first nine months of 2004, including $2.3 million of DAC and $9.8 million of
VOBA amortization attributed to the MONY companies, due to increases in current
margins, partially offset by the unlocking impact from recognition of higher
expected future margins driven by higher fees related to variable insurance and
annuity contracts.
DAC capitalization increased $21.3 million during the first nine months of 2004
to $776.2 million. DAC capitalization in third quarter 2004 related to the MONY
companies totaled $49.2 million. The Equitable Life Insurance Group decrease in
capitalization is primarily due to lower variable annuity sales partially offset
by higher life sales.
Interest expense increased $15.0 million to $162.3 million during the first nine
months of 2004, principally due to interest expense on the Holding Company debt
issued in third quarter 2004 and to the MONY Group Inc. debt
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assumed. The proceeds from the new Holding Company borrowings were used to fund
the MONY acquisition during that same quarter.
Rent expense also showed a $15.0 million increase during the first nine months
of 2004, principally due to the $6.8 million attributed to the MONY acquisition
and to increases of $5.8 million in the Investment Management segment.
Amortization of intangible assets increased $5.4 million from $18.8 million the
first nine months of 2003 principally due to mutual fund distribution fee and
brokerage distribution system amortization in third quarter 2004.
Other operating costs and expenses totaled $770.7 million for the nine months
ended September 30, 2004, with increases of $151.1 million in the Financial
Advisory/Insurance segment offset by a $130.6 million decrease in the Investment
Management segment. The Financial Advisory/Insurance segment increase was
primarily due to the $33.0 million write-off of capitalized software related to
the MONY integration, higher EQAT and VIP Trust subadvisory fees due to higher
asset values, with the MONY companies contributing $65.0 million of expenses in
third quarter 2004. The decrease in other operating expenses for the Investment
Management segment were principally due to the $190.0 million charge for legal
proceedings and mutual fund matters recorded in third quarter 2003. Alliance's
third quarter 2004 expenses included a $3.5 million impairment loss on its
exchange memberships.
Premiums and Deposits. Total premiums and deposits for insurance and annuity
products, including the MONY companies, for the first nine months of 2004
decreased from prior year levels by $929.8 million to $10.48 billion. MONY
distribution channels contributed $421.7 million to total life and annuity sales
in third quarter 2004. When the MONY distribution sales are excluded, sales of
annuities in the first nine months of 2004 decreased 14.2% from the strong 2003
period, but increased by 45% over the comparable 2002 period's sales. The
decline in the 2004 period was primarily due to $1.31 billion lower premiums and
deposits in the wholesale channel resulting primarily from lower sales of
variable annuities, partially offset by $107.1 million higher retail channel
premiums and deposits. First year life premiums and deposits increased $91.7
million to $260.9 million for the first nine months of 2004, including the MONY
distribution channels' sales of $51.7 million. Total sales of mutual funds and
fee based assets gathered increased $994.3 million to $3.07 billion in the first
nine months of 2004, with the MONY distribution channels contributing $388.2
million to that increase.
Surrenders and Withdrawals. Total surrenders and withdrawals, including the MONY
companies, increase $1.12 billion to $4.70 billion for the first nine months of
2004. The MONY companies' total surrenders and withdrawals for third quarter
2004 were $222.1 million, $114.1 million of which was for annuities and $108.0
million for life products. When totals for the first nine months of 2004 are
compared to the comparable 2003 period, surrenders and withdrawals for the
Equitable Life Insurance Group increased from $3.58 billion to $4.48 billion,
with respective increases of $622.6 million and $267.0 million reported for
individual annuities and variable and interest-sensitive life product lines. The
Equitable Life Insurance Group's annualized annuities surrender rate decreased
to 8.0% in the 2004 period from 8.5% in the comparable period in 2003, while the
Equitable Life Insurance Group's individual life surrender rates showed an
increase to 5.4% from 4.3%. The dollar increase in annuity surrenders resulted
from higher account balances driven by market appreciation and positive net cash
flows. The Equitable Life Insurance Group's 2004 individual life surrender rate
included the impact of the surrender of a single large COLI contract in the
first quarter of 2004 and a large partial withdrawal from a COLI contract in
third quarter 2004. The trends in surrender and withdrawal rates described above
continue to fall within the range of expected experience.
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Assets Under Management. An analysis of assets under management follows:
ASSETS UNDER MANAGEMENT
(IN MILLIONS)
SEPTEMBER 30,
-----------------------------------
2004 (1) 2003
--------------- ---------------
Third party..................................................................... $ 435,750 $ 383,367
General Account and other....................................................... 54,395 40,245
Separate Accounts............................................................... 61,135 48,584
=============== ===============
Total Assets Under Management................................................... $ 551,280 $ 472,196
=============== ===============
(1) Includes the assets of and those managed by the MONY companies beginning
third quarter 2004.
Third party assets under management at September 30, 2004 increased $52.38
billion primarily due to increases at Alliance, with the MONY companies
contributing $6.67 billion in third quarter 2004. General Account and other
assets under management increased $14.15 billion from the amounts reported at
September 30, 2003 primarily due to the MONY companies' $13.11 billion impact in
third quarter 2004. The $12.55 billion increase in Separate Account assets under
management resulted from market appreciation and net new deposits and to the
third quarter 2004 addition totaling $4.80 billion for the MONY companies,
partially offset by the conversion of an institutional real estate Separate
Account into a private REIT in second quarter 2004.
Alliance assets under management at September 30, 2004 totaled $487.0 billion as
compared to $437.76 billion at September 30, 2003. This increase during the 12
month period ended September 30, 2004 resulted from market appreciation of $13.1
billion, $30.7 billion and $4.9 billion, respectively, in retail, institutional
and private client AUM and net asset inflows of $3.0 billion and $5.0 billion,
respectively, in the institutional investment management and private client
distribution channels partially offset by $4.7 million and $2.8 million of net
long-term outflows and net cash management redemptions, respectively, in the
retail channel. Non-US clients accounted for 22.9% of Alliance's September 30,
2004 assets under management total.
On October 28, 2004, Alliance announced that Alliance and Federated Investors,
Inc. ("Federated") had reached a definitive agreement for Federated to acquire
Alliance's cash management business. Under the agreement, Federated will acquire
the assets under management of 22 third-party-distributed money market funds of
AllianceBernstein Cash Management Services, which totaled approximately $29
billion at September 30, 2004. The transaction will not include the assets of
AllianceBernstein Exchange Reserves, Inc., which will continue to be available
to investors in other AllianceBernstein mutual funds. In addition, Alliance will
continue to meet the liquidity needs of investors in its private client, managed
account and institutional investment management businesses. The capital gain,
net of income taxes and minority interest, that would be recognized upon the
closing of the transaction in 2005 is not expected to be material to AXA
Financial. Estimated contingent payments received from Federated in the five
years following the closing are expected to be similar in amount to the
business's anticipated profit contribution over that period. The overall effect
on earnings is, therefore, expected to be immaterial.
LIQUIDITY AND CAPITAL RESOURCES
Holding Company. The Holding Company paid cash dividends of $100.0 million in
the first nine months of 2003; no dividends were paid in the comparable 2004
period.
On July 7, 2004, the Holding Company issued Subordinated Notes to AXA, AXA Group
Life Insurance (Japan) and AXA Insurance Co. (Japan) in the amounts of $510.0
million, $500.0 million and $270.0 million, respectively. The $1.28 billion in
proceeds from these borrowings were used to fund the MONY acquisition. The
Subordinated Notes have a maturity date of July 15, 2019 and a floating interest
rate, which resets semiannually on July 15 and January 15. Concurrently, the
Holding Company entered into an interest rate swap with AXA, converting the
floating rate on these Subordinated Notes to a fixed rate of 5.11% for the first
three years. Including the impact of the swap, the 2004 interest cost related to
the Subordinated Notes will total approximately $32.2 million.
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On July 8, 2004, AXA Financial completed its acquisition of MONY and paid, or
made provisions to pay, MONY shareholders approximately $1.5 billion,
representing $31 in cash for each share of MONY common stock. MONY shareholders
also received a dividend from MONY totaling $0.34755 per share.
As of September 30, 2004, former MONY stockholders holding approximately 3.6
million shares of MONY common stock, representing approximately 7.1% of MONY
common stock outstanding at July 8, 2004 (the effective date of the MONY
acquisition), have demanded appraisal pursuant to Section 262 of the General
Corporation Law of the State of Delaware and have not withdrawn their demands.
The fair value of shares of MONY common stock to be determined in the appraisal
process, which is the amount that will be payable by AXA Financial to the
holders of shares subject to the appraisal, could be greater or less than the
$31.00 per share paid to former MONY stockholders who did not demand appraisal
under Delaware law. See Note 14 of Notes to Consolidated Financial Statements.
On July 9, 2004, AXA and certain of its subsidiaries, including AXA Financial,
entered into a (a)3.5 billion global revolving credit facility and a $650
million letter of credit facility, which mature on July 9, 2009, with a group of
30 commercial banks and other lenders. Under the terms of the revolving credit
facility, up to $500.0 million is available to AXA Financial for general
corporate purposes, while the letter of credit facility makes up to $500 million
available to AXA Financial (Bermuda) Ltd., an AXA Financial subsidiary.
During the first nine months of 2004 and 2003, respectively, AXA Financial
purchased 302,481 and 539,250 AXA ADRs for approximately $6.7 million and $7.8
million. These shares were used for restricted stock awards under AXA
Financial's 1997 stock incentive plan.
Equitable Life. In the first nine months of 2004, Equitable Life paid cash
dividends of $250.0 million, as compared to $150.0 million in the prior year's
comparable period.
In first quarter 2004, Equitable Life amended the terms of its $350.0 million
credit facility to extend its March 31, 2004 maturity date to October 15, 2004.
No other terms of this facility were affected. The credit facility expired on
October 15 and was not renewed. At September 30, 2004, no amounts were
outstanding under Equitable Life's commercial paper program or its revolving
credit facility.
Alliance. Alliance has cumulatively paid $300 million related to market
timing-related matters and legal proceedings, including the $293 million paid
during the first nine months of 2004. As a result of charges for such matters
recorded in the second half of 2003, there were no cash distributions paid in
first quarter 2004; cash distributions for the second and third quarters totaled
$382.8 million.
In the nine months of 2004, subsidiaries of Alliance paid approximately $37.9
million to purchase 974,458 Alliance Holding Units to fund deferred compensation
plans.
FORWARD-LOOKING STATEMENTS AND RISK CONSIDERATIONS
AXA Financial's management has made in this report, and from time to time may
make in its public filings and press releases as well as in oral presentations
and discussions, forward-looking statements concerning AXA Financial's
operations, economic performance and financial position. Forward-looking
statements include, among other things, discussions concerning AXA Financial's
potential exposure to market risks, as well as statements expressing
management's expectations, beliefs, estimates, forecasts, projections and
assumptions, as indicated by words such as "believes," "estimates," "intends,"
"anticipates," "expects," "projects," "should," "probably," "risk," "target,"
"goals," "objectives," or similar expressions. AXA Financial claims the
protection afforded by the safe harbor for forward-looking statements contained
in Section 21E of the Exchange Act, and assumes no duty to update any
forward-looking statement. Forward-looking statements are based on management's
expectations and beliefs concerning future developments and their potential
effects, and are subject to risks and uncertainties. Actual results could differ
materially from those anticipated by forward-looking statements due to a number
of important factors including those discussed elsewhere in this report and in
AXA Financial's other public filings, press releases, oral presentations and
discussions. The following discussion highlights some of the more important risk
and other factors that could cause such differences and/or, if realized, could
have a material adverse effect on AXA Financial's consolidated financial
position and/or results of operations.
Market Risk. AXA Financial's businesses are subject to market risks arising from
its insurance asset/liability management, investment management and trading
activities. The primary market risk exposures result from interest rate
fluctuations, equity price movements and changes in credit quality. The nature
of each of these risks is
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discussed under the caption "Quantitative and Qualitative Disclosures About
Market Risk" and in Note 16 of Notes to Consolidated Financial Statements, both
contained in the 2003 Form 10-K.
Increased volatility of equity markets can impact profitability of the Financial
Advisory/Insurance and Investment Management segments. For the Financial
Advisory/Insurance segment, in addition to impacts on equity securities held in
the General Account, significant changes in equity markets impact asset-based
policy fees charged on variable life and annuity products. Moreover, for
variable life and annuity products with GMDB/GMIB features, sustained periods
with declines in the value of underlying Separate Account investments would
increase the Financial Advisory/Insurance segment's net exposure to guaranteed
benefits under those contracts (increasing claims and reserves, net of any
reinsurance or hedging) at a time when fee income for these benefits is also
reduced from prior period levels. Increased volatility of equity markets also
will result in increased volatility of the fair value of the GMIB reinsurance
contracts.
Equity market volatility also may impact DAC and VOBA amortization on variable
and universal life insurance contracts, variable annuities and participating
traditional life contracts. To the extent that actual market trends, and
reasonable expectations as to future performance drawn from those trends, lead
to reductions in the investment return and/or other related estimates underlying
the DAC and VOBA amortization rates, DAC and VOBA amortization could be
accelerated. Volatile equity markets can also impact the level of contractholder
surrender activity, which, in turn, can impact future profitability.
Interest rate fluctuations, equity price movements and changes in credit quality
may also affect invested assets held in the qualified pension plan which could
impact future pension plan costs.
The effects of significant equity market fluctuations on the Financial
Advisory/Insurance segment's operating results can be complex and subject to a
variety of estimates and assumptions, such as assumed rates of long-term equity
market performance, making it difficult to reliably predict effects on operating
earnings over a broad range of equity market performance alternatives. Further,
these effects may not always be proportional for market increases and market
decreases.
Margins on interest-sensitive annuities and universal life insurance can be
affected by interest rate fluctuations. In a declining interest rate
environment, credited rates can generally be adjusted more quickly than the
related invested asset portfolio is affected by declining reinvestment rates,
tending to result in higher net interest margins on interest-sensitive products
in the short term. However, under scenarios in which interest rates fall and
remain at significantly lower levels, minimum guarantees on interest-sensitive
annuities and universal life insurance (generally 1.5% to 4.5%) could cause the
spread between the yield on the portfolio and the interest rate credited to
policyholders to deteriorate and in some cases, potentially, to become negative.
For both interest-sensitive annuities and universal life insurance, a rapid and
sustained rise in interest rates poses risks of deteriorating spreads and high
surrenders. In such an environment, there is pressure to increase credited rates
on interest-sensitive products to match competitors' new money rates. However,
such changes in credited rates generally occur more quickly than the earned
rates on the related invested asset portfolios reflect changes in market yields.
The greater and faster the rise in interest rates, the more the earned rates
will tend to lag behind market rates.
For the Investment Management segment, significant changes in equity markets can
impact revenues and the recoverability of deferred costs. See "Other Risks of
the Investment Management Segment" below.
Other Risks of the Financial Advisory/Insurance Segment. The Financial
Advisory/Insurance segment's future sales of life insurance and annuity products
and financial planning services are dependent on numerous factors including:
successful implementation of AXA Financial's strategy; the intensity of
competition from other insurance companies, banks and other financial
institutions; conditions in the securities markets; the strength and
professionalism of distribution channels; the continued development of existing
and additional channels; the financial and claims-paying ratings of Equitable
Life, MONY Life and MLOA; its reputation and visibility in the market place; its
ability to develop, distribute and administer competitive products and services
in a timely, cost-effective manner; its ability to provide effective financial
planning services that meet its customers' expectations; its ability to obtain
reinsurance for certain products, the offering of which products depends upon
the ability to reinsure all or a substantial portion of the risks; its
investment management performance; and unanticipated changes in industry trends.
In addition, the nature and extent of competition and the markets for products
sold by the Financial Advisory/Insurance segment may be materially affected by
changes in laws and regulations, including changes
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relating to savings, retirement funding and taxation. Management cannot predict
what proposals may be made, what legislation, if any, may be introduced or
enacted or what the effect of any such legislation might be. See "Business
- - Regulation" contained in the 2003 Form 10-K.
The profitability of the Financial Advisory/Insurance segment depends on a
number of factors including: levels of gross operating expenses and the amount
which can be deferred as DAC and software capitalization; successful
implementation of expense-reduction initiatives, including those anticipated
from the integration of the businesses of AXA Financial and MONY; secular
trends; increased costs and impact of compliance, regulatory examinations and
oversight; the ability to reach sales targets for key products including the
continuing market receptivity of its variable annuity product, Accumulator(R)
'04; AXA Financial's mortality, morbidity, persistency and claims experience;
margins between investment results from General Account Investment Assets and
interest credited on individual insurance and annuity products, which are
subject to contractual minimum guarantees; the level of claims and reserves on
contracts with GMDB/GMIB and other guaranteed features, the impact of related
reinsurance and the effectiveness of any program to hedge certain risks
associated with such features; the account balances against which policy fees
are assessed on universal and variable life insurance and variable annuity
products; the pattern of DAC and VOBA amortization which is based on models
involving numerous estimates and subjective judgments including those regarding
investment, mortality and expense margins, expected market rates of return,
lapse rates and anticipated surrender charges; the adequacy of reserves and the
extent to which subsequent experience differs from management's estimates and
assumptions, including future reinvestment rates, used in determining those
reserves; and the effects of any future terrorist attacks or the war on
terrorism. With regard to terrorism generally, in August 2004, the Federal
government announced a heightened threat level for financial institutions.
Recoverability of DAC and VOBA is dependent on future contract cash flows
(including premiums and deposits, contract charges, benefits, surrenders,
withdrawals, and expenses), which can be affected by equity market and interest
rate trends as well as changes in contract persistency levels. The performance
of General Account Investment Assets depends, among other things, on levels of
interest rates and the markets for equity securities and real estate, the need
for asset valuation allowances and writedowns, and the performance of equity
investments that have created, and in the future may create, significant
volatility in investment income.
Other Risks of the Investment Management Segment. Alliance's revenues are
largely dependent on the total value and composition of assets under its
management and are, therefore, affected by the performance of financial markets,
the investment performance of sponsored investment products and separately
managed accounts, additions and withdrawals of assets, purchases and redemptions
of mutual funds and shifts of assets between accounts or products with different
fee structures, as well as general economic conditions, future acquisitions,
competitive conditions and government regulations, including tax rates. See
"Results of Continuing Operations by Segment - Investment Management" contained
in the 2003 Form 10-K. Recently, a number of regulators have been focusing
attention on various practices in or affecting the investment management and/or
mutual fund industries, including, among others, late trading, market timing,
and revenue sharing. In December 2003, Alliance resolved regulatory claims with
the SEC and NYAG related to market timing in certain of its mutual funds.
Alliance's involvement in the market timing investigations and ongoing
litigation relating thereto, as well as other litigation, may have an adverse
effect on AXA Financial's and Alliance's assets under management, including an
increase in mutual fund redemptions, and may cause or prolong general
reputational damage, both of which could adversely affect AXA Financial's and
Alliance's results of operations.
Payments by Alliance made to financial intermediaries in connection with the
sale of back-end load shares under Alliance's mutual fund distribution system
are capitalized as deferred sales commissions and amortized over periods not
exceeding five and one-half years, the periods of time during which the deferred
sales commission asset is expected to be recovered from distribution services
fees received from those funds and from contingent deferred sales charges
("CDSC") received from shareholders of those funds upon redemption of their
shares. CDSC cash recoveries are recorded as reductions of unamortized deferred
sales commissions when received. The recorded amount of the net deferred sales
commission asset was $280.7 million at September 30, 2004. Payments of sales
commissions made to financial intermediaries in connection with the sale of
back-end load shares under Alliance's mutual fund distribution system during the
first nine months of 2004 and of 2003, net of CDSC received of $26.1 million and
$26.6 million, respectively, totaled approximately $31.9 million and $80.1
million, respectively.
Alliance's management tests the deferred sales commission asset for
recoverability quarterly, or monthly when events or changes in circumstances
occur that could significantly increase the risk of impairment of the asset. As
of September 30, 2004, Alliance's management determined that the deferred sales
commission asset was not impaired. If Alliance's management determines in the
future that the deferred sales commission asset is not recoverable, an
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impairment condition would exist and a loss would be measured as the amount by
which the recorded amount of the asset exceeds its estimated fair value.
Estimated fair value is determined using Alliance management's best estimate of
future cash flows discounted to a present value amount.
During the three month period ended September 30, 2004, equity markets decreased
by approximately 2% and increased 2% for the nine months ended September 30,
2004, as measured by the change in the Standard & Poor's 500 Stock Index. Fixed
income markets increased by approximately 3% in third quarter 2004 and during
the first nine months of 2004 as measured by the change in the Lehman Brothers'
Aggregate Bond Index. The redemption rates for domestic back-end load shares
were 23.8% and 25.1%, respectively, for the third quarter and first nine months
of 2004. Declines in financial markets or higher redemption levels, or both, as
compared to the assumptions used to estimate undiscounted future cash flows,
could result in the impairment of the deferred sales commission asset. Due to
the volatility of the capital markets and changes in redemption rates,
Alliance's management is unable to predict whether or when a future impairment
of the deferred sales commission asset might occur. Should an impairment occur,
any loss would reduce materially the recorded amount of the asset with a
corresponding charge to expense.
Other Discontinued Operations. The determination of the allowance for future
losses for the discontinued Wind-Up Annuities continues to involve numerous
estimates and subjective judgments including those regarding expected
performance of investment assets, asset reinvestment rates, ultimate mortality
experience and other factors that affect investment and benefit projections.
There can be no assurance that the losses provided for will not differ from the
losses ultimately realized. To the extent actual results or future projections
of Other Discontinued Operations differ from management's current best estimates
underlying the allowance, the difference would be reflected as earnings or loss
from discontinued operations within the consolidated statements of earnings. In
particular, to the extent income, sales proceeds and holding periods for equity
real estate differ from management's previous assumptions, periodic adjustments
to the allowance are likely to result.
Disclosure and Internal Control System. There are inherent limitations in the
effectiveness of any system of disclosure and internal controls, including the
possibilities of faulty judgments in decision-making, simple error or mistake,
fraud, the circumvention of controls by individual acts or the collusion of two
or more people, or management override of controls. Accordingly, even an
effective disclosure and internal control system can provide only reasonable
assurance with respect to disclosures and financial statement preparation.
Furthermore, because of changes in conditions, the effectiveness of a disclosure
and internal control system may vary over time.
Technology and Information Systems. AXA Financial's information systems are
central to, among other things, designing and pricing products, marketing and
selling products and services, processing policyholder and investor
transactions, client recordkeeping, communicating with retail sales associates,
employees and clients, and recording information for accounting and management
purposes in a secure and timely manner. These systems are maintained to provide
customer privacy and are tested to ensure the viability of business resumption
plans. Any significant difficulty associated with the operation of such systems,
or any material delay or inability to develop needed system capabilities, could
have a material adverse effect on AXA Financial's results of operations and,
ultimately, its ability to achieve its strategic goals.
Legal Environment. A number of lawsuits have been filed against life and health
insurers and affiliated distribution companies involving insurers' sales
practices, alleged agent misconduct, failure to properly supervise agents and
other matters. Some of the lawsuits have resulted in the award of substantial
judgments against other insurers, including material amounts of punitive
damages, or in substantial settlements. In some states, juries have substantial
discretion in awarding punitive damages. AXA Financial's insurance subsidiaries
and related companies, like other life and health insurers, are involved in such
litigation and the results of operations and financial position of AXA Financial
and such insurance subsidiaries and related companies could be affected by
defense and settlement costs and any unexpected material adverse outcome in such
litigations as well as in other material litigations pending against them. The
frequency of large damage awards, including large punitive damage awards that
bear little or no relation to actual economic damages incurred by plaintiffs in
some jurisdictions, continues to create the potential for an unpredictable
judgment in any given matter. In addition, examinations by Federal and state
regulators and other regulatory and related agencies including, among others,
state insurance and securities regulators could result in adverse publicity,
sanctions and fines. In the last year, Equitable Life, EQAT, MLOA, MSC, Premier
Trust, VIP Trust, AXA Advisors, AXA Distributors and other AXA Financial
subsidiaries have received various requests for information and documents from
the SEC, the NASD and state insurance and securities regulators. The requests
have sought information relating to, among other things, supervisory issues,
market timing, late trading, valuation, suitability, replacements and exchanges
of variable life insurance and annuities, collusive bidding practices,
investment company "revenue sharing" arrangements, advisory operations directed
brokerage arrangements, fund portfolio brokerage commissions, mutual fund sales
and
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marketing, "networking arrangements" and related matters. Each of the requests
has been or is being responded to, including through the provision of requested
documents. At this time, management cannot predict what other actions the SEC,
the NASD and/or other regulators may take or what the impact of such actions
might be. For further information, see "Business - Regulation" and "Legal Pro-
ceedings," contained in the 2003 Form 10-K and herein.
Future Accounting Pronouncements. In the future, new accounting pronouncements,
as well as new interpretations of accounting pronouncements, may have material
effects on AXA Financial's consolidated statements of earnings and shareholders'
equity. See Note 2 of Notes to Consolidated Financial Statements in the 2003
Form 10-K for pronouncements issued but not effective at December 31, 2003 as
well as Note 5 of Notes to Consolidated Financial Statements contained herein.
Regulation. The businesses conducted by AXA Financial's subsidiaries are subject
to extensive regulation and supervision by state insurance departments and
Federal and state agencies regulating, among other things, insurance and
annuities, securities transactions, investment companies, investment advisors
and anti-money laundering compliance programs. Changes in the regulatory
environment could have a material impact on operations and results. The
activities of the Financial Advisory/Insurance segment are subject to the
supervision of the insurance regulators of each of the 50 states, the District
of Columbia and Puerto Rico. See "Business - Regulation" contained in the 2003
Form 10-K.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted pursuant to General Instruction H to Form
10-Q.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of AXA Financial's
disclosure controls and procedures as of September 30, 2004. Based on that
evaluation, management, including the Chief Executive Officer and Chief
Financial Officer, concluded that AXA Financial's disclosure controls and
procedures are effective. Except for the enhancements to internal controls
described below, there has been no change in AXA Financial's internal control
over financial reporting that occurred during the period covered by this report
that has materially affected, or is reasonably likely to materially affect, AXA
Financial's internal control over financial reporting.
Management has reported to the Audit Committee that, based on a review of
certain of Equitable Life's life reinsurance assumed agreements, the reserves
for an experience refund provision under one life reinsurance assumed agreement
have been increased in third quarter of 2004 by approximately $40.5 million.
Management has reviewed Equitable Life's material existing life reinsurance
assumed agreements to confirm that all experience refund provisions have been
identified and is reviewing all of its life reinsurance assumed agreements to
confirm all other material terms and obligations. In addition, management is
enhancing existing analytical procedures relating to performance trends with
respect to Equitable Life's life reinsurance assumed agreements.
In connection with the continuing integration process associated with AXA
Financial's recent acquisition of MONY, management has enhanced, and continues
to enhance, the overall internal control environment of MONY Life and MLOA by
implementing new procedures and controls, including increasing and re-allocating
staffing in the accounting department, instituting additional account
reconciliations and upgrading the investment accounting computer systems.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 14 of Notes to Consolidated Financial Statements contained
herein. Except as disclosed in Note 14 of Notes to Consolidated Financial
Statements, there have been no new material legal proceedings and no new
material developments in legal proceedings previously reported in the 2003
Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Number Description and Method of Filing
- ------ ------------------------------------------------------------------------
31.1 Section 302 Certification made by the Registrant's Chief Executive
Officer
31.2 Section 302 Certification made by the Registrant's Chief Financial
Officer
32.1 Section 906 Certification made by the Registrant's Chief Executive
Officer
32.2 Section 906 Certification made by the Registrant's Chief Financial
Officer
Certain non-registered long-term Subordinated Notes issued
by the Registrant (discussed in Note 1 of Notes to
Consolidated Financial Statements contained in this Form
10-Q) are omitted from this Item 6(a) pursuant to Item 601
of Regulation S-K. Registrant will furnish to SEC upon
request.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, AXA
Financial, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 12, 2004 AXA FINANCIAL, INC.
By: /s/ Stanley B. Tulin
----------------------------------------
Name: Stanley B. Tulin
Title: Vice Chairman of the Board and
Chief Financial Officer
Date: November 12, 2004 /s/ Alvin H. Fenichel
----------------------------------------
Name: Alvin H. Fenichel
Title: Senior Vice President and
Controller
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